Question

Distinguish between the nominal rate and the real rate of interest. How does inflation affect the real, ex post (after the fact) rate of return to investors?

Answer #1

Nominal rate of interest will be the rate of interest which will not differentiate between the the real rate of interest and inflation and it will be including the inflation also.

real rate of interest will eliminate the effect of inflation from the overall accounting of the interest rate and it is the pure interest rate after taking out the effect of inflation in the economy.

Real interest rates are getting affected by the inflation and it will be added to the real interest rate in order to achieve the nominal interest rate which will be the investor rate of return.

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...

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...

Define inflation? compare and contrast the real rate of return,
the nominal rate of return, and the ex ante nominal rate of return,
using either real-life examples or hypothetical examples.

An increase in the rate of inflation will:(multiple choice)
increase both the real and the nominal rate of interest.
increase the nominal interest rate but will not affect the real
interest rate.
increase the nominal interest rate while lowering the real
interest rate.
decrease both the real and the nominal rate of interest.
increase the real interest rate but not affect the nominal
interest rate.

Suppose the one year nominal interest rate is 3 percent and that
the expected inflation is equal to 4 percent. The price index over
this one year period went from 218 to 223. Compare the ex-ante real
rate of interest to the ex-post real rate of interest. Which real
rate of interest would you more likely be willing to spend today
and which real rate of interest would you more likely be willing to
save and why?

Question One: Distinguish between the nominal and real rates of
interest using an example.
Question Two: Why does an entrepreneur deserve to be compensated
with profit?

Tax bracket: 20%, nominal return: 10%, Inflation rate: 6%
a.before-tax real rate?
b.after-tax real return?
c.after-tax nominal return?
d.after-tax real interest rate?
e.??=????????? ????
× ??? ???????it=inflation rate × tax
bracket?
f.????? ??? ????
??????− ????? ??? ????
???????? ????−??after tax real
return- after tax real interest rate-it?

Tax bracket: 20%, nominal return: 10%, Inflation rate: 6%
a.before-tax real rate?
b.after-tax real return?
c.after-tax nominal return?
d.after-tax real interest rate?
e.??=????????? ????
× ??? ???????it=inflation rate × tax
bracket?
f.????? ??? ????
??????− ????? ??? ????
???????? ????−??after tax real
return- after tax real interest rate-it?

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.

If investors are to earn a 3.3%
real interest rate, what nominal interest rate must they earn if
the inflation rate is
a. zero
b. 4.3%
c. 6.3%

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