Question

what is inflation and real interest rates

Answer #1

Inflation is the rate in which the price of the commodity or products is rising and the purchasing power is decreasing , Inflation can be measured by

Change in inflation = (final cost price index value/ initial cost price index value), a average level of inflation is needed in the market because to reduce oversaving among the people and to flow money in the market for a good economy

Real interest rate

This interest rate adjust with inflation , to be specific

Real interest rate = nominal interest rate - inflation (it can be actual or expected), this rate will reflect the borrower and lender in the market, since inflation is not fixed the real interest rates is made on future inflation , the real interest rate will provide how much return the lender will get.

What are the current trends of inflation and the real interest
rates on the market today?

What is inflation and real interest rates as seen by authors:
Berk, DeMarzo and Hartford

What is “the market” saying about interest rates, inflation
rates, real economic growth, and energy supply & demand into
the foreseeable future?

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.

a. What is realised real interest rate? Can a change in expected
inflation rate affect the realised real interest rate? Explain.
b. Suppose that there is an increase in expected inflation rate
from 3 percent to 6 percent. Given that the after-tax expected real
interest rate remains unchanged at 2 percent and the tax rate is 30
percent, find the original and the new nominal interest rates.
c. Suggest ONE way in which investors can reduce/avoid the risk
of unexpected...

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?

Determinants of Interest Rates
The real risk-free rate is 3%. Inflation is expected to be 2%
this year, 4% next year, and then 4% thereafter. The maturity risk
premium is estimated to be 0.0003 x (t - 1), where t = number of
years to maturity. What is the nominal interest rate on a 7-year
Treasury security? Do not round intermediate calculations. Round
your answer to two decimal places.
%

ch 5 What is The impact of inflation on interest rates.

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...

Under what situations are you likely to see negative real rates
of return?
A. Nominal rates > real rates
b. inflation > nominal rates
c. nominal rates=real rates
d. inflation > real rates
e. nominal rates > inflation

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