Question

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?

Answer #1

Nominal interest rate does not adjust for the inflation. It does not take inflation into consideration. The interest rate that is stated on bonds and loans.

Real interest rate takes inflation into account and adjusts for inflation. It is the real rate of a loan or bond.

Real interest rate = Nominal inflation rate-expected inflation

a. real interest rate = 6%-4% = 2%

b. 2%= 3%- expected inflation

Expected inflation = 1%

c. 1% =nominal interest rate+1%

nominal interest rate = 0%

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?

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.

What is the value of the real interest rate in each of the
following situations?
The nominal interest rate is 15%, and the expected inflation
rate is 13%.
The nominal interest rate is 12%, and the expected inflation
rate is 9%.
The nominal interest rate is 10%, and the expected inflation
rate is 9%.
The nominal interest rate is 5%, and the expected
inflation rate is 1%.
In which of the above situations would you prefer to be the
lender?...

Real and nominal rates of interest Zane Perelli currently has
$100 that he can spend today on socks costing $2.50 each.
Alternatively, he could invest the $100 in a risk-free U.S.
Treasury security that is expected to earn 9% nominal rate of
interest. The consensus forecast of leading economist is a 5% rate
of inflation over the coming year.
1. Number of Socks Zane Can Purchase today?
2. If Zane invests the money for 1 year he will have?
3....

Describe the likely importance of the difference between nominal
and effective interest rates from the perspective of an individual:
1) buying a new automobile using a 60-month installment loan,
versus an individual 2) investing for their retirement in a 401k
plan through their employer.

Given the nominal interest rate of 13% and the expected
inflation of 15%, then the value of the real interest rate is ___
?
2. With the real interest rate equal to 3% and the expected
inflation equal to 2%, then the value of the nominal interest rate
is___?
3. A lender prefers a (high or lower) real interest rate while a
borrower prefers a (higher or lower) real interest rate higher
lowreal interest rate.

Nominal interest rates are higher than real interest rates as
long as
A.expected inflation is positive.
B.the government taxes interest income.
C.inflation is expected to decline in the future.
D.long-term interest rates are higher than short-term interest
rates.

You are told that the nominal interest rates in Country A is
14%, and the nominal interest rates in Country B is 8 %. Economists
estimate that the real interest rate is 2% per year in both
countries.
a) What would you expect inflation to be in Country A and
Country B?
b) If the exchange rate adjusts to keep the real prices of goods
the same in the two countries, how would the exchange rate between
Country A and...

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.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 1 minute ago

asked 10 minutes ago

asked 21 minutes ago

asked 26 minutes ago

asked 33 minutes ago

asked 36 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago