You are given the following information about the economy. the nominal interest rate = 8 percent; the real rate of interest 6 percent. The inflation premium isMultiple Choice8 percent.6 percent.2 percent.O14 percent.1@@D2Q54#3< Previ 21 of 25%5QWERANSDLLFxC6Next >&278* 0TYU66)9C00ידPVGHJKL>BNMH

Inflation Premium ExplainedIn the Fisher equation (i = r + π), the inflation premium (π) represents…

Answered: You are given the following information…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the real interest rate is 3% and expected inflation is 3%. What is the nominal interest rate? nominal interest rate: = I All else equal, if inflation decreases by 0%, what will happen to the nominal interest rate? o The real interest rate will decrease by 0%. o The nominal interest rate will decrease by 0 %. o The nominal interest rate will increase by 0%. o The real interest rate will increase by 0%. 1 What do economists call the relationship between the nominal interest rate and the inflation rate? o shoeleather costs Leontief paradox 86 • Taylor rule Fisher equation
Use the table of data to answer the following question: Table 17.3 Nominal interest rate 7% Inflation rate 1.5% Risk premium 1% Suppose you have the option to purchase for $955 a two-year old bond with a $1,000 face value and one year left that has a coupon rate of 8-percent, or, purchase a new one-year bond for $1,000. What should you do? O a. Purchase used bond because the real interest rate is higher than the new bond's real interest rate. O b. Purchase new bond because the real interest rate is higher than the used bond's real interest rate. OC There is not enough information to determine the best investment option. O d. Purchase either bond because the real interest rate is the same for both options.
A C Inflation rate, Inflation Inflation T 4.5 4 Chart D 3.5 3 2.5 2 1 2 Select one or more: O Chart A Chart B Chart C 3 4 5 6 VPC 7 8 PC = π¹ 9 MR Output, Y B Inflation Inflation 11 10 Time period Figure 14 Policy response to a positive demand shock 13 15 17 12 14 16 18 19 4.5 20 4 3.5 3 2.5 2 2 3 19 4 5 7 9 11 13 15 17 8 10 12 14 16 18 20 Time period 6 D Inflation VPC 76 rate, Figure 14 shows four charts labelled A to D depicting aspects of a positive permanent demand shock. Charts B and C are from the DD209 macrosimulator, while Charts A and D show MR curves. Which two of these charts are consistent with the policy response from a central bank that has a strong inflation aversion? (Choose two answers.) MR PC = n¹ Output, Y
X Corp would like to borrow from Y Corp. The risk free rate is 6% with current inflation rate of 2%. In the following year the inflation rate will increase by 1%. How much is the interest rate that Y should impose to X? A• 4% B• 6% C• 5% D• 7%
3
12. Inflation-induced tax distortions Ashwin receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% 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 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Ashwin's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate (Percent) (Percent) (Percent) (Percent) 2.5 4.5 7.0 4.5 Compared with higher inflation rates, a lower inflation rate will nominal interest income. This tends to ▼saving, thereby the economy's long-run growth rate. After-Tax Real Interest Rate (Percent) the…
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You are given the following information about the economy: the nominal interest rate = 8 percent; the real rate of interest = 6 percent. The inflation premium is Multiple Choice O 2 percent. O 8 percent. 6 percent. O O 14 percent. MacBook Pro % 95 74 Q $ #3 M 66 E R T & 27 Y * 8 U A ll 61 0
2-1 Justin's demand for good 1 is given by the formula: x (p1, p2, I) = Suppose... 4-P1+6-p2 P1=$7/unit P2=$4/unit and I=$214 By how much will Justin's consumption of good 1 change if all prices AND his income were t increase by the same percent, as is the case here, this is called "pure inflation"). (Note: The numbers may change between questions, so read carefully) (Note: The answer may not be a whole number, so round to the nearest hundredth) 2-1 Justin's demand for good 1 is given by the formula: 2f (P1, P2, I) = how mucl 4-P1+6-p2 1=$2/unit 2=$2/unit nd =$531 Jote: The numbers may change between questions, so read carefully) Jote: The answer may not be a whole number, so round to the nearest hundredth)
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3. Explain any three costs associated with inflation? Also, provide a real-world example of hyperinflation that happened in the past.
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?

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