Question

Question 1) Suppose Joe lends Maxine $ 750 for the year. At the end of the year, Maxine repays Joe the $ 750 plus an additional payment of $112.50 for the use of Joe’s money during the year. Assuming there is no inflation during the year, what is the interest rate Maxine pays Joe?

Select one: a. 0.15%

b. 1.5%

c. 15%

d. 115%

1a) Marty borrows $1000 from Harry on January 1, 2013, and promises to repay Harry on December 31, 2017, a payment that will result in Harry earning rate of interest of 10%. Suppose Harry tells Marty he will lend him the money if he earns an annual rate of interest of 12%. this will result in Marty’s paying Harry a

Select one:

a. smaller amount than if the interest rate were 10%

b. larger amount than if the interest rate were 10%

1b) Suppose Joe lends Maxine $ 750 for the year. At the end of the year, Maxine repays Joe the $ 750 plus an additional payment of $112.50 for the use of Joe’s money during the year. Assuming there is no inflation during the year, what is the interest rate Maxine pays Joe?

Select one: a. 0.15%

b. 1.5%

c. 15%

d. 115%

1c) Suppose Joe lends Maxine $ 750 for the year. At the end of the year, Maxine repays Joe the $ 750 plus an additional payment of $112.50 for the use of Joe’s money during the year. Maxine, when borrowing the funds from the Joe, anticipates the inflation rate for the year will be 10%, while Joe expects it to be 7 %. Inflation is actually 8% for the year. Which of the following statements is true?

Select one:

a. The nominal interest rate for this loan is 7%

b. Joe benefits unexpected from this higher than expected inflation rate.

c. The real interest rate for this loan is 7%

d. Maxine benefits unexpectedly from this lower tha expected inflation rate.

Answer 1

1) 15%..

($750*15%*1 = $112.5... interest for $750 @15% for 1 year with no inflation)..

1a) larger amount than if the interest rate were 10%

(As the rate of interest 12% is more than the rate of interest of 10%. So, thus resulting in Marty's paying harry larger amount)..

1b) 15%..

(Interest for $750 @15% for 1 year =$112.5 with no inflation rate Maxine will pay this amount to Joe)..

1c) Maxine benefits unexpectedly from this lower than expected inflation rate.

(As Maxine borrows money from Joe expecting a high inflation rate which eventually turned out to be a low inflation rate. Thus Maxine now have to return less money than he anticipated)...

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