3 Suppose your friend asks to borrow $100 from you and says he will pay you back in a year at an interest rate of 5% (suppose that you can trust him). You have two options: to lend him the money or keep it. a) What must the inflation rate be for you to be indifferent between the two options? b) Supposing you loan your friend the money. How much wealthier (poorer) would you be (relative to keeping it) if the inflation rate is 2%? What about 10%?

3 Suppose your friend asks to borrow $100 from you and says he will pay you back in a year at an interest rate of 5% (suppose that you can trust him). You have two options: to lend him the money or keep it. a) What must the inflation rate be for you to be indifferent between the two options? b) Supposing you loan your friend the money. How much wealthier (poorer) would you be (relative to keeping it) if the inflation rate is 2%? What about 10%?

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter13: Inflation

Section: Chapter Questions

Problem 2SQP

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