Question

Please explain the difference between the nominal and real interest rate in the short-run and the long-run. How and why does the quantity theory help us understand the relationship between the money supply, interest rates and inflation? How and why are nominal interest rates so low in the U.S. today? Please all the tools at your disposal to demonstrate your understanding of the market today.

Answer #1

Nominal interest rate is defined as the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest.

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. The real interest rate reflects the rate of time-preference for current goods over future goods.

Nominal interest rates exist in contrast to real interest rates and effective interest rates. Real interest rates tend to be important to investors and lenders, while effective rates are significant for borrowers as well as investors and lenders.

Nominal rate = real interest rate + inflation rate, Real rate = nominal rate - inflation rate.

What is the difference between nominal and real interest rates?
Explain the relationship between the interest rate and investment
by graph. If the interest rate increases how does change
investment, aggregate demand (AD) and output? Why?

Describe the difference between nominal
and real interest rates. Calculate the missing value in each of the
following scenarios:
Expected inflation is 4% and the nominal interest rate is 6%,
what is the real interest rate?
The real interest rate is 2% and the nominal interest rate is
3%, what is expected inflation?
Expected inflation is -1% and the real interest rate is 1%, what
is the nominal interest rate?

3. Distinction Between Real and Nominal Interest Rates
a. Distinguish between a nominal versus a real interest
rate.
b. If a bond gives you a 4% nominal annual interest rate and the
inflation rate over the year is 2%, what is the real ex post rate
of return you receive? Real Rate You Receive _______________
c. If an investor wants a real rate of return of 2% and expects
inflation to be 2% next year, what nominal rate should the...

What is the difference between nominal and real interest rates
and why should you care?

(Show all correct answers.) According to the long-run
macroeconomic theory of nominal variables discussed in class, the
price level increases if:
a. the quantity of money in the economy increases
b. the growth rate of the quantity of money in the economy
increases
c. there is a cut in taxes
d. there is an increase in government spending
(Show all correct answers.) Which of the following statements
about the Fisher effect are correct?
a. An x percent increase in inflation...

Distinguish between the nominal rate and the real rate of
interest. How does inflation affect the real, ex post (after the
fact) rate of return to investors?

According to classical macroeconomic theory, changes in the
money supply affect
nominal variables and real variables.
nominal variables, but not real variables.
real variables, but not nominal variables.
neither nominal nor real variables.
The sticky-wage theory of the short-run aggregate supply curve
says that when the price level rises more than expected,
production is more profitable and employment rises.
production is more profitable and employment falls.
production is less profitable and employment rises.
production is less profitable and employment falls....

Explain why nominal wage is "sticky" in the short run, and why
the short-run aggregate supply curve is upward sloping?
Explain why the long-run aggregate supply curve is a vertical
line.
Part b (10 points)
In labor macroeconomics, the process to determine nominal wage
between the employer (firm) and the workers, commonly known as the
wage determination process is often illustrated as the following
graph. Explain in words the wage determination process.
Hint: The wage determination process indicates how an...

1) Explain what is the difference between
real and nominal GDP?
2 ) and explain why do
economists need to make this distinction?
3) Is
the CPI a biased measure of the inflation rate? Explain your
answer.

rough Ideas of the questions and graphs
please
1. Contrast the ideas of nominal and real GDP. Why is one more
reliable than the other for comparing changes in the standard of
living over a series of years? Use the concept of real and nominal
GDP to compare the years 1980 and 2017. Which year was a better
year for the economy and why? 2. What are the 4 phases of the
business cycle? How long does a business cycle...

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