4. Inflation can redistribute wealth between borrowers and savers. Consider the following four cases. In each case, assume that when the loan was negotiated the nominal interest rate was set such that the lender would earn a 3% real return based on inflation expectations. Apply the Fisher effect to calculate the agreed upon nominal interest rate. Given that the actual inflation differs from the expected inflation rate, what was the actual real interest rate over the course of the loan? Who was harmed from the unexpected change? The borrower or the lender? Explain. Nominal Actual (Actual) real Who gets Expected inflation Expected real return interest rate inflation rate interest rate hurt? (En) (1) Borrower or lender 4% 3% 5% 6% 3% 4% -1% 3% 1% 3% 3% 3%

4. Inflation can redistribute wealth between borrowers and savers. Consider the following four cases. In each case, assume that when the loan was negotiated the nominal interest rate was set such that the lender would earn a 3% real return based on inflation expectations. Apply the Fisher effect to calculate the agreed upon nominal interest rate. Given that the actual inflation differs from the expected inflation rate, what was the actual real interest rate over the course of the loan? Who was harmed from the unexpected change? The borrower or the lender? Explain. Nominal Actual (Actual) real Who gets Expected inflation Expected real return interest rate inflation rate interest rate hurt? (En) (1) Borrower or lender 4% 3% 5% 6% 3% 4% -1% 3% 1% 3% 3% 3%

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the inflation premium is 8.00 percent and the nominal interest rate is 4.00 percent. Instructions: In part a and b, round your answers to 2 decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. What is the real interest rate? b. What if the inflation premium is 9.00 percent while the nominal interest rate is 2.00 percent?
Q1 An economy produces only 2 final goods: hamburgers and bicycles. In 2019, 1000 hamburgers were produced and sold at £8 per unit, while 200 bicycles were produced and sold at £200 per unit. In 2020, 800 hamburgers were produced and sold at £8.20 per unit, while 225 bicycles were produced and sold at £230 per unit. Using this information, the aggregate inflation rate for this economy between 2019 and 2020 is: досто + 40000 A. 56.9% B. 40.0% C. 42.2% D. 25.0%
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Consider borrowers and lenders who agree to loans with fixed nominal interest rate- If inflation is lower than what the borrowers and lenders expected, then who benefits from higher real interest rates? A) Only the borrowers benefit. B) Only the lenders benefit. OC) Both borrowers and lenders benefit. D) Neither borrowers nor lenders benefit.
1. Currently the prime interest rate, which is the interest rate given to customers with the best credit, in the United States is 3.25% and the inflation rate is 1.3%. a. How much is the real interest rate? b. What will happen to the real interest rate if – all else equal – the inflation rate increases? Provide an example to support your answer. How will the change in the real interest rate from part b, affect the quantity of savings in the United States? How will this change affect the supply of loanable funds. C.
For each of the following years, determine the real interest rate. Find the difference between this rate and the desired real interest rate and explain how any difference affects borrowers and lenders. Write out percentage rates as whole numbers e.g. 5%. a. In year 1, the nominal interest rate is 10%, the inflation premium on loans is 4%, and actual rate of inflation is 5%. %, the desired real interest is %, borrowers are (Click to select) and lenders are The real interest rate is (Click to select) b. In year 2, the nominal interest rate is 11%, the inflation premium is 5%, and the actual rate of inflation is 3%. %, borrowers are (Click to select) %, the desired real interest is The real interest rate is (Click to select) ✓ c. In year 3, the nominal interest rate is 9%, the inflation premium is 3%, and the actual rate of inflation is 3%. %, borrowers are (Click to select) and lenders are The real interest rate is (Click to select) %, the desired real interest is and lenders are
just answer part c , d and e notice that you can do it without the answer of part a and b
1. Calculating inflation using a simple price index Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student's annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2019, 2020, and 2021. The cost of each item in the basket and the total cost of the basket are shown for 2019. Perform these same calculations for 2020 and 2021, and enter the results in the following table. Notebooks Calculators Large coffees Energy drinks Textbooks Total cost Price index Price Cost Price Quantity in Basket (Dollars) (Dollars) (Dollars) 10 15 50 7 1 100 100 150 1 150 50 2 100 10 100 1,000 5 5 5 5 Suppose the base year for this price index is 2019. Between 2019 and 2020, the CSPI increased by 2019 1,400 100 110 1 3 120 5 5 2020 Cost (Dollars) In the last row of the table, calculate and enter the value of the CSPI for the remaining years. Price (Dollars) 11 140 1 4 150 5 5 %.…
Assume the expected rate of inflation is 3 percent per year. What nominal interest rate should you charge to receive a real interest rate of 2 percent per year?
assume instead that the nominal interest rate is 4 percent and the expected rate of inflation is minus 1 percent. Calculate the real rate of interest.
b) What is the difference between nominal interest rate and real interest rate? Does the central bank control the real or the nominal rate? What do we assume in our model?
Suppose the inflation premium is 2 percent and the nominal interest rate is 1 percent. Instructions: in part a, enter your answer as a whole number. In part b, round your answer to 1 decimal place. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers a. What is the real interest rate? percent b. What is the real interest rate if the inflation premium is 3 percent while the nominal interest rate is 0.5 percent? percent