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%?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4
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