Question

You expect inflation over the next year to be -2.5%. Actual inflation over the last year was 2.59%, and the current nominal interest rate is 6.3%. What is your expected real rate of interest (in %)? Round to 0.01%. E.g., if your answer is 3.145%, record it as 3.15.

Answer #1

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Over the next year, the real interest rate is 2% and the
expected inflation rate is 5%.
A. What is the nominal interest rate on a one-year loan?
B. Assume that the actual inflation rate turns out to be 3%,
instead of 5%. • Who benefits, the lender or the borrower? • What
is the realized real interest rate on this loan?

If the real interest rate was large during the last year, then
a. inflation is expected to exceed the nominal interest rate in the
future. b. inflation is expected to be less than the nominal
interest rate in the future. c. actual inflation was less than the
nominal interest rate. d. actual inflation was greater than the
nominal interest rate.

Inflation is expected to be 3 percent over the next year. You
desire an annual real rate of return of 2.5 percent on your
investments. What market rate of interest would have to be offered
on a one-year Treasury security for you to consider making an
investment?
1.5 percent
5.5 percent
4.5 percent
0.5 percent
None of the above

If workers and firms expect that inflation will be 3 percent
next year, and real wages are not changing over time, by how much
will nominal wages increase?
A)
more than 3 percent
B)
less than 3 percent
C)
3 percent
D)
depends on actual inflation for next year

The real risk-free rate is 2.5%. Inflation is expected to be
2.5% this year and 4% during the next 2 years. Assume that the
maturity risk premium is zero.
What is the yield on 2-year Treasury securities? Do not round
intermediate calculations. Round your answer to two decimal
places.
%
What is the yield on 3-year Treasury securities? Do not round
intermediate calculations. Round your answer to two decimal
places.
%

You want to have $300,000 in real terms 7 years from now.
You expect inflation over that time period to be 4% per year. Your
investments earn 7% APR (nominal) compounded annually.
Based on your expectations, you construct a growing nominal annuity
to meet your investment target. What is the nominal cash-flow you
would have to deposit in year 5 if inflation turns out to what you
expected?

Suppose the underlying real interest rate is 4%. People expect
an inflation rate of 2.3% over the next year.
a) At what rate will banks set their interest rates?
b) Suppose inflation turns out to be 3%. Using your answer from
(a), what does the real interest rate turn out to be?
c) Explain why unexpectedly high inflation helps borrowers

Due to a recession, expected inflation this year is only 2.5%.
However, the inflation rate in Year 2 and thereafter is expected to
be constant at some level above 2.5%. Assume that the expectations
theory holds and the real risk-free rate (r*) is 3%. If the yield
on 3-year Treasury bonds equals the 1-year yield plus 3%, what
inflation rate is expected after Year 1? Round your answer to two
decimal places.

Due to a recession, expected inflation this year is only 2.5%.
However, the inflation rate in Year 2 and thereafter is expected to
be constant at some level above 2.5%. Assume that the expectations
theory holds and the real risk-free rate (r*) is 3%. If the yield
on 3-year Treasury bonds equals the 1-year yield plus 3%, what
inflation rate is expected after Year 1? Round your answer to two
decimal places.

The real risk-free rate is 3.15%. Inflation is expected to be
2.45% this year, 3.75% next year, and 2% thereafter. The maturity
risk premium is estimated to be 0.05 × (t - 1)%, where t =
number of years to maturity. What is the yield on a 7-year Treasury
note? Do not round intermediate calculations. Round your answer to
two decimal places.

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