Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a 2 percent real return per year. Instructions: Enter your responses as as whole numbers. a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 110 in one year and 121 in two years. What nominal rate of interest should Frank charge Sarah? The nominal rate of interest charged should be %. b. Suppose Frank and Sarah are unsure what the CPI will be in two years. How should Frank index Sarah's annual repayments to ensure that he gets an annual 2 percent real rate of return. Frank should charge Sarah) % (Click to select) the inflation rate.
Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a 2 percent real return per year. Instructions: Enter your responses as as whole numbers. a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 110 in one year and 121 in two years. What nominal rate of interest should Frank charge Sarah? The nominal rate of interest charged should be %. b. Suppose Frank and Sarah are unsure what the CPI will be in two years. How should Frank index Sarah's annual repayments to ensure that he gets an annual 2 percent real rate of return. Frank should charge Sarah) % (Click to select) the inflation rate.
Chapter17: Inflation
Section: Chapter Questions
Problem 5SQ
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Transcribed Image Text:Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a 2 percent real return per year.
Instructions: Enter your responses as as whole numbers.
a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 110 in one year and 121 in two years. What
nominal rate of interest should Frank charge Sarah?
The nominal rate of interest charged should be
%.
b. Suppose Frank and Sarah are unsure what the CPI will be in two years. How should Frank index Sarah's annual repayments to
ensure that he gets an annual 2 percent real rate of return.
Frank should charge Sarah)
% (Click to select) the inflation rate.
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