8. Inflation-induced tax distortionsPat receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 3% per year.The nominal interest rate on the bonds adjusts automatically to account for the inflation rate.The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario.Given the real interest rate of 3% per year, find the nominal interest rate on Pat's bonds, the after-tax nominal interest rate, and the after-tax realinterest rate under each inflation scenario.Inflation Rate Real Interest Rate Nominal Interest Rate(Percent)2.56.5(Percent)3.03.0(Percent)After-Tax Nominal Interest Rate(Percent)After-Tax Real Interest Rate(Percent)Compared with lower inflation rates, a higher inflation rate willnominal interest income. This tends tosaving, therebythe economy's long-run growth rate.the after-tax real interest rate when the government taxesthe quantity of investment in the economy and

Approach to solving the question: Fill in the table first using the formulas. These can be used to…

Answered: 8. Inflation-induced tax distortions…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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a. If the economy is currently at full employment, at what level should the central bank set the nominal interest rate? b. At what level should the central bank set the nominal interest rate if the economy is 20% below potential GDP? c. Explain the difference between the nominal interest rate and the real interest rate. Using these concepts of the nominal interest rate and the real interest rate explain how lenders can protect themselves from any negative effects of inflation if the inflation is fully anticipated.
8. The price level was 118.3 in 1988, 124.0 in 1989, and 130.7 in 1990. What were the rates of inflation for 1989 and 19907? If people expect the rate of inflation to be the average rate of inflation for the previous 2 years, what was the expected rate of inflation for 1991? The nominal interest rate in 1991 was 5.4 percent. What was the real interest rate?
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
4) Inflation will reduce workers' real wage and so decrease the number of available workers. This outcome is desirable when demand for workers declines and the worker are reluctant to have a cut in their nominal wage. demand for workers increases and the workers are reluctant to have a cut in their nominal wage. demand for workers declines and the workers are willing to have a cut in their nominal wage. demand for workers increases and the workers are willing to have a cut in their nominal wage.
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 %.…
4. If the nominal interest rate is fixed over the life of a loan, the consequences of inflation being higher than expected are that A. the real interest rate will be higher than expected, and the lender will benefit. B. the real interest rate will be lower than expected, and the lender will benefit. C. the real interest rate will be lower than expected, and the borrower will benefit. D. the real interest rate will be higher than expected, and the borrower will benefit. E. the real interest rate will remain unchanged over the life of the loan, and the lender will benefit at the expense of the borrower. 5. Under what circumstance would the nominal interest rate be positíve but the real interest rate be negative? A. Expected inflation is negative. B. Expected inflation is zero. C. Expected inflation is exactly equal to the nominal interest rate. D. Expected inflation is greater than the nominal interest rate.
(Minimum of 100 Words). Determine how the following situations will affect the nominal interest rate levels: a. There is the anticipated higher government budget deficit. b. The expected inflation in the coming months is high.
4. In which of these situations is the real interest rate NEGATIVE? A) The nominal interest rate is 3% and the inflation rate is 4% B) The nominal interest rate is -5% and the inflation rate is -6% C) The nominal interest rate is 2% and the inflation rate is -1% D) The nominal interest rate is 4% and the inflation rate is 4%
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
1
3. Inflation and the nominal interest rate When the actual and expected (or anticipated) inflation rates are both zero, the nominal interest rate must equal the real interest rate. How might inflation affect the nominal interest rate? The nominal interest rate is determined by the forces of supply and demand in the loanable funds market (in millions of dollars). The following graph input tool shows the market for loanable funds. Use the graph input tool to help you answer the questions that follow. You can shift the supply and demand curves by changing the values of the supply and demand shifters on the right. You will not be graded on any changes you make to the graph input tool. INTEREST RATE (Percent) 0 0 100 200 400 300 LOANABLE FUNDS (Millions of dollars) 500 Graph Input Tool Interest Rate (Percent) Quantity demanded. (Millions of dollars) Demand Shifter Expected Inflation (percent) When the expected inflation rate is zero, the nominal interest rate is rate of and a real interest…
The table below has in the first column the expected inflation rate and the second column contains the actual inflation rate. Using your knowledge about real and nominal rates, which years are better for borrowing compared to lending? Explain your reasoning. Year Expected Inflation (%) Actual Inflation (%) 2011 3.76 3.14 2012 1.62 2.07 2013 1.52 1.47 2014 1.72 1.62 2015 0.08 0.12 2016 1.00 1.27 2017 2.06 2.14 2018 2.73 2.43 2019 1.77 1.81 2020 1.37 1.25

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