INTEREST RATE, r (Percent) O Short-term interest rates O Long-term interest rates Which tend to be more volatile, short- or long-term interest rates? O O O O O 1.87% O 2.20% S2 CAPITAL (Billions of dollars) If the inflation rate was 3.40% and the nominal interest rate was 5.60% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places. O 2.53% O 2.75% $1 + Equilibrium
INTEREST RATE, r (Percent) O Short-term interest rates O Long-term interest rates Which tend to be more volatile, short- or long-term interest rates? O O O O O 1.87% O 2.20% S2 CAPITAL (Billions of dollars) If the inflation rate was 3.40% and the nominal interest rate was 5.60% over the last year, what was the real rate of interest over the last year? Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places. O 2.53% O 2.75% $1 + Equilibrium
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter6: Measuring The Cost Of Living
Section: Chapter Questions
Problem 9PA
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Solve these 2 practice problems. Info for the 1.
![INTEREST RATE, r (Percent)
16
co
Which
to be more
O Short-term interest rates
O Long-term interest rates
O 1.87%
O 2.20%
CAPITAL (Billions of dollars)
O 2.53%
O 2.75%
long-term
If the inflation rate was 3.40% and the nominal interest rate was 5.60% over the last year, what was the real rate of interest over the last year?
Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places.
S1
rates?
**
Equilibrium](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Faf434c73-38f1-4a89-b981-edd99d760c82%2F3a9cc8d2-ba05-4df4-82db-7ab4b21bcf9f%2Fv2ep4bq_processed.png&w=3840&q=75)
Transcribed Image Text:INTEREST RATE, r (Percent)
16
co
Which
to be more
O Short-term interest rates
O Long-term interest rates
O 1.87%
O 2.20%
CAPITAL (Billions of dollars)
O 2.53%
O 2.75%
long-term
If the inflation rate was 3.40% and the nominal interest rate was 5.60% over the last year, what was the real rate of interest over the last year?
Disregard cross-product terms; that is, if averaging is required, use the arithmetic average. Round intermediate calculations to four decimal places.
S1
rates?
**
Equilibrium
![The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next two years and 7%
thereafter.
The maturity risk premium (MRP) is determined from the formula: 0.1(t-1) %, where t is the security's maturity. The liquidity premium (LP) on all
National Transmissions Corp.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums
(DRP):
Rating
U.S. Treasury
AAA
AA
A
BBB
O 5.45%
National Transmissions Corp. issues 14-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if
averaging is required, use the arithmetic average.
O 12.04%
O 11.29%
Default Risk Premium
O 12.59%
0.60%
0.80%
1.05%
1.45%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
O The yield on an AAA-rated bond will be higher than the yield on a BB-rated bond.
O Higher inflation expectations increase the nominal interest rate demanded by investors.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Faf434c73-38f1-4a89-b981-edd99d760c82%2F3a9cc8d2-ba05-4df4-82db-7ab4b21bcf9f%2F0lkopyx_processed.png&w=3840&q=75)
Transcribed Image Text:The real risk-free rate (r*) is 2.8% and is expected to remain constant. Inflation is expected to be 8% per year for each of the next two years and 7%
thereafter.
The maturity risk premium (MRP) is determined from the formula: 0.1(t-1) %, where t is the security's maturity. The liquidity premium (LP) on all
National Transmissions Corp.'s bonds is 0.55%. The following table shows the current relationship between bond ratings and default risk premiums
(DRP):
Rating
U.S. Treasury
AAA
AA
A
BBB
O 5.45%
National Transmissions Corp. issues 14-year, AA-rated bonds. What is the yield on one of these bonds? Disregard cross-product terms; that is, if
averaging is required, use the arithmetic average.
O 12.04%
O 11.29%
Default Risk Premium
O 12.59%
0.60%
0.80%
1.05%
1.45%
Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true?
O The yield on an AAA-rated bond will be higher than the yield on a BB-rated bond.
O Higher inflation expectations increase the nominal interest rate demanded by investors.
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