Question

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.

Answer #1

*ANSWER*

**Nominal Interest Rates are the rates that are Quoted by
Banks. Such Rates are Infusion of Real Interest Rates and the
Expected Inflation. In other words, Nominal Interest Rates Includes
Real Interest Rate and Expected Inflation since any Investor would
wnat his Return over and above Inflation Rate. So when Inflation
Rate will be Positive, Nominal Rate will always Exceed Real
Interest Rate because if Nominal Rate is Less than or Equal to the
Real Rate than nobody will prefer to Invest in Banks as they are
not able to coverup the Inflation Rate.**

**
CORRECT ANSWER - Option (A)**

Real output growth will be higher than nominal output growth
whenever:
There is positive inflation.
There is deflation.
There is hyperinflation.
There is stagflation.

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?

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.

If real interest rates are 1% and nominal interest rates are 4%,
annual inflation expectations are about 3% True False
The dividends paid on stock issued by corporations in the United
States are tax deductible to the issuing corporation True False
A bond will sell at a premium if its required return or discount
rate is greater than its coupon rate. True False
Which of the following statements is most correct?
More firms fail or suffer financial distress during periods...

A downward-sloping term structure of interest rates may be an
indication of _________.
Multiple Choice
Issuance of bonds with longer terms to maturity.
Lower expected real rate of interest.
Higher expected future inflation.
Lower expected future inflation.
A downward-sloping term structure of interest rates may be an
indication of _________. Multiple Choice Issuance of bonds with
longer terms to maturity. Lower expected real rate of interest.
Higher expected future inflation. Lower expected future
inflation.

Inflation-induced tax distortions
Sam receives a portion of his income from his holdings of
interest-bearing U.S. government bonds. The bonds offer a real
interest rate of 4.5% per year. The nominal interest rate on the
bonds adjusts automatically to account for the inflation rate.
The government taxes nominal interest income at a rate of 10%.
The following table shows two scenarios: a low-inflation scenario
and a high-inflation scenario.
Given the real interest rate of 4.5% per year, find the nominal...

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...

An increase in the rate of inflation will leave real and nominal
rates unchanged in the long run. True or false? Use IS and LM
curves to explain your answer.

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.

Long-term (nominal) U.S. Treasury Bonds ------------ in the
short-to-medium term.
Short-term (nominal) U.S. T-Bills ---------- in the
short-to-medium term.
U.S. stocks ---------- in the short-to-medium
term.
Options for blanks:
Provide no/zero protection against inflation
Provide good protection against inflation
Are exported to inflation
Suppose that your investment strategy is to buy a 15-year
Treasury Inflation Protected Security (TIPS), hold it for 1 year,
then sell it and buy another 15-year TIPS. You plan to repeat this
process until you retire (in 45...

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