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60) Suppose that the forecast for next year's annual inflation rate is a = 5%, and for the annual interest rate is i = 4%. a) What will be the corresponding real rate of interest for the next year? b) Using the values of a and i in part a), suppose you borrow $10 000 for a year at i = 4% and buy 5000 units of a certain item that has a current cost of $2 per unit. If the price of this item is tied to a rate of inflation, a = 5%, and you sell the items one year from now at the inflated price, what will be your net gain on this transaction?

60) Suppose that the forecast for next year's annual inflation rate is a = 5%, and for the annual interest rate is i = 4%. a) What will be the corresponding real rate of interest for the next year? b) Using the values of a and i in part a), suppose you borrow $10 000 for a year at i = 4% and buy 5000 units of a certain item that has a current cost of $2 per unit. If the price of this item is tied to a rate of inflation, a = 5%, and you sell the items one year from now at the inflated price, what will be your net gain on this transaction?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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60) Suppose that the forecast for next year's annual inflation rate is a = 5%, and for the annual interest rate is i = 4%. a) What will be the corresponding real rate of interest for the next year? b) Using the values of a and i in part a), suppose you borrow $10 000 for a year at i = 4% and buy 5000 units of a certain item that has a current cost of $2 per unit. If the price of this item is tied to a rate of inflation, a = 5%, and you sell the items one year from now at the inflated price, what will be your net gain on this transaction?
Transcribed Image Text:60) Suppose that the forecast for next year's annual inflation rate is a = 5%, and for the annual interest rate is i = 4%. a) What will be the corresponding real rate of interest for the next year? b) Using the values of a and i in part a), suppose you borrow $10 000 for a year at i = 4% and buy 5000 units of a certain item that has a current cost of $2 per unit. If the price of this item is tied to a rate of inflation, a = 5%, and you sell the items one year from now at the inflated price, what will be your net gain on this transaction?
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