Elvira has a major building project. She will need to borrow money. If she can borrow money at a real interest rate of 3.5%, or less, the project will be profitable. However, if the borrowing is set at a real rate higher than 3.5%, the project will be a loss. The bank is offering her a rate of 13% currently. The CPI is due to be released tomorrow. The CPI from one year ago is 263.014. The current CPI is 284.55. Assume the bank's rate is 13% throughout, and the CPI from one year ago is the same at 263.014. Elvira expects tomorrow's CPI to be 290.35. Whether tomorrow's CPI is the same (284.55) or at Elvira's expectation (290.35) the rate is expected to continue. She must commit to the bank today or tomorrow. If she doesn't get the loan, she will be fired. Should she borrow now or wait for the release of CPI data? Why? What are the relevant numbers involved?
Elvira has a major building project. She will need to borrow money. If she can borrow money at a real interest rate of 3.5%, or less, the project will be profitable. However, if the borrowing is set at a real rate higher than 3.5%, the project will be a loss. The bank is offering her a rate of 13% currently. The CPI is due to be released tomorrow. The CPI from one year ago is 263.014. The current CPI is 284.55. Assume the bank's rate is 13% throughout, and the CPI from one year ago is the same at 263.014. Elvira expects tomorrow's CPI to be 290.35. Whether tomorrow's CPI is the same (284.55) or at Elvira's expectation (290.35) the rate is expected to continue. She must commit to the bank today or tomorrow. If she doesn't get the loan, she will be fired. Should she borrow now or wait for the release of CPI data? Why? What are the relevant numbers involved?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Elvira has a major building project. She will need to borrow money. If she can borrow money at a real interest rate of 3.5%, or less, the project will be profitable. However, if the borrowing is set at a real rate higher than 3.5%, the project will be a loss. The bank is offering her a rate of 13% currently. The CPI is due to be released tomorrow. The CPI from one year ago is 263.014. The current CPI is 284.55. Assume the bank's rate is 13% throughout, and the CPI from one year ago is the same at 263.014. Elvira expects tomorrow's CPI to be 290.35. Whether tomorrow's CPI is the same (284.55) or at Elvira's expectation (290.35) the rate is expected to continue. She must commit to the bank today or tomorrow. If she doesn't get the loan, she will be fired. Should she borrow now or wait for the release of CPI data? Why? What are the relevant numbers involved?
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