Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by the Fisher effect. Inflation: When the price of any good increases continuously for an interval of time it is called inflation. The formula to calculate inflation rate is: Inflation Rate = Nominal Interest Rate − Real Interest Rate Fisher Effect: According to this effect, when there is a rise in the expected inflation rate, then there is always a rise in the nominal interest rate provided loanable fund quantity and interest rate does not change.

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Answer 1

Question

Chapter 10, Problem 10P

To determine

Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by the Fisher effect.

Inflation: When the price of any good increases continuously for an interval of time it is called inflation. The formula to calculate inflation rate is:

Inflation Rate=Nominal Interest Rate−Real Interest Rate

Fisher Effect: According to this effect, when there is a rise in the expected inflation rate, then there is always a rise in the nominal interest rate provided loanable fund quantity and interest rate does not change.

Expert Solution & Answer

Answer to Problem 10P

a. When Real inflation Rate is 4%

Given,

Nominal interest rate is 8%.

Real interest is3%.

Expected inflation is 5%.

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 4% for inflation rate as follows:

Real Interest Rate=8%−4%=4%

Explanation of Solution

If the real inflation is 4%, then it means that the real interest paid by Mr. B is 4%. However, at the initial agreement (expected inflation 5%), he was paying only 3% as real interest.

This shows that Mr. B is worse off and Mr. L is better off.

b. When Real inflation Rate is 7%

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 7% for inflation rate as follows:

Real Interest Rate=8%−7%=1%

If the real inflation is 7%, then it means that real interest paid by Mr. B is 1%. However, at the initial agreement (at 5% expected inflation), he was paying 3% as real interest.

This shows that Mr. B is better off and Mr. L is worseoff because now the real interest paid by Mr. B is less than earlier.

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Answer 2

Question

Chapter 10, Problem 10P

To determine

Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by the Fisher effect.

Inflation: When the price of any good increases continuously for an interval of time it is called inflation. The formula to calculate inflation rate is:

Inflation Rate=Nominal Interest Rate−Real Interest Rate

Fisher Effect: According to this effect, when there is a rise in the expected inflation rate, then there is always a rise in the nominal interest rate provided loanable fund quantity and interest rate does not change.

Expert Solution & Answer

Answer to Problem 10P

a. When Real inflation Rate is 4%

Given,

Nominal interest rate is 8%.

Real interest is3%.

Expected inflation is 5%.

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 4% for inflation rate as follows:

Real Interest Rate=8%−4%=4%

Explanation of Solution

If the real inflation is 4%, then it means that the real interest paid by Mr. B is 4%. However, at the initial agreement (expected inflation 5%), he was paying only 3% as real interest.

This shows that Mr. B is worse off and Mr. L is better off.

b. When Real inflation Rate is 7%

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 7% for inflation rate as follows:

Real Interest Rate=8%−7%=1%

If the real inflation is 7%, then it means that real interest paid by Mr. B is 1%. However, at the initial agreement (at 5% expected inflation), he was paying 3% as real interest.

This shows that Mr. B is better off and Mr. L is worseoff because now the real interest paid by Mr. B is less than earlier.

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Answer 3

Question

Chapter 10, Problem 10P

To determine

Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by the Fisher effect.

Inflation: When the price of any good increases continuously for an interval of time it is called inflation. The formula to calculate inflation rate is:

Inflation Rate=Nominal Interest Rate−Real Interest Rate

Fisher Effect: According to this effect, when there is a rise in the expected inflation rate, then there is always a rise in the nominal interest rate provided loanable fund quantity and interest rate does not change.

Expert Solution & Answer

Answer to Problem 10P

a. When Real inflation Rate is 4%

Given,

Nominal interest rate is 8%.

Real interest is3%.

Expected inflation is 5%.

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 4% for inflation rate as follows:

Real Interest Rate=8%−4%=4%

Explanation of Solution

If the real inflation is 4%, then it means that the real interest paid by Mr. B is 4%. However, at the initial agreement (expected inflation 5%), he was paying only 3% as real interest.

This shows that Mr. B is worse off and Mr. L is better off.

b. When Real inflation Rate is 7%

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 7% for inflation rate as follows:

Real Interest Rate=8%−7%=1%

If the real inflation is 7%, then it means that real interest paid by Mr. B is 1%. However, at the initial agreement (at 5% expected inflation), he was paying 3% as real interest.

This shows that Mr. B is better off and Mr. L is worseoff because now the real interest paid by Mr. B is less than earlier.

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Answer 4

Question

Chapter 10, Problem 10P

To determine

Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by the Fisher effect.

Inflation: When the price of any good increases continuously for an interval of time it is called inflation. The formula to calculate inflation rate is:

Inflation Rate=Nominal Interest Rate−Real Interest Rate

Fisher Effect: According to this effect, when there is a rise in the expected inflation rate, then there is always a rise in the nominal interest rate provided loanable fund quantity and interest rate does not change.

Expert Solution & Answer

Answer to Problem 10P

a. When Real inflation Rate is 4%

Given,

Nominal interest rate is 8%.

Real interest is3%.

Expected inflation is 5%.

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 4% for inflation rate as follows:

Real Interest Rate=8%−4%=4%

Explanation of Solution

If the real inflation is 4%, then it means that the real interest paid by Mr. B is 4%. However, at the initial agreement (expected inflation 5%), he was paying only 3% as real interest.

This shows that Mr. B is worse off and Mr. L is better off.

b. When Real inflation Rate is 7%

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 7% for inflation rate as follows:

Real Interest Rate=8%−7%=1%

If the real inflation is 7%, then it means that real interest paid by Mr. B is 1%. However, at the initial agreement (at 5% expected inflation), he was paying 3% as real interest.

This shows that Mr. B is better off and Mr. L is worseoff because now the real interest paid by Mr. B is less than earlier.

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Answer 5

Chapter 10, Problem 10P

To determine

Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by the Fisher effect.

Inflation: When the price of any good increases continuously for an interval of time it is called inflation. The formula to calculate inflation rate is:

Inflation Rate=Nominal Interest Rate−Real Interest Rate

Fisher Effect: According to this effect, when there is a rise in the expected inflation rate, then there is always a rise in the nominal interest rate provided loanable fund quantity and interest rate does not change.

Expert Solution & Answer

Answer to Problem 10P

a. When Real inflation Rate is 4%

Given,

Nominal interest rate is 8%.

Real interest is3%.

Expected inflation is 5%.

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 4% for inflation rate as follows:

Real Interest Rate=8%−4%=4%

Explanation of Solution

If the real inflation is 4%, then it means that the real interest paid by Mr. B is 4%. However, at the initial agreement (expected inflation 5%), he was paying only 3% as real interest.

This shows that Mr. B is worse off and Mr. L is better off.

b. When Real inflation Rate is 7%

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 7% for inflation rate as follows:

Real Interest Rate=8%−7%=1%

If the real inflation is 7%, then it means that real interest paid by Mr. B is 1%. However, at the initial agreement (at 5% expected inflation), he was paying 3% as real interest.

This shows that Mr. B is better off and Mr. L is worseoff because now the real interest paid by Mr. B is less than earlier.

Answer 6

Chapter 10, Problem 10P

To determine

Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by the Fisher effect.

Inflation: When the price of any good increases continuously for an interval of time it is called inflation. The formula to calculate inflation rate is:

Inflation Rate=Nominal Interest Rate−Real Interest Rate

Fisher Effect: According to this effect, when there is a rise in the expected inflation rate, then there is always a rise in the nominal interest rate provided loanable fund quantity and interest rate does not change.

Expert Solution & Answer

Answer to Problem 10P

a. When Real inflation Rate is 4%

Given,

Nominal interest rate is 8%.

Real interest is3%.

Expected inflation is 5%.

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 4% for inflation rate as follows:

Real Interest Rate=8%−4%=4%

Explanation of Solution

If the real inflation is 4%, then it means that the real interest paid by Mr. B is 4%. However, at the initial agreement (expected inflation 5%), he was paying only 3% as real interest.

This shows that Mr. B is worse off and Mr. L is better off.

b. When Real inflation Rate is 7%

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 7% for inflation rate as follows:

Real Interest Rate=8%−7%=1%

If the real inflation is 7%, then it means that real interest paid by Mr. B is 1%. However, at the initial agreement (at 5% expected inflation), he was paying 3% as real interest.

This shows that Mr. B is better off and Mr. L is worseoff because now the real interest paid by Mr. B is less than earlier.

Answer 7

Chapter 10, Problem 10P

To determine

Change in Interest Rate: Interest rate depends on several factors. One such factor is expected inflation rate. The relationship of interest rate and inflation rate is described by the Fisher effect.

Inflation: When the price of any good increases continuously for an interval of time it is called inflation. The formula to calculate inflation rate is:

Inflation Rate=Nominal Interest Rate−Real Interest Rate

Fisher Effect: According to this effect, when there is a rise in the expected inflation rate, then there is always a rise in the nominal interest rate provided loanable fund quantity and interest rate does not change.

Answer 8

Expert Solution & Answer

Answer to Problem 10P

a. When Real inflation Rate is 4%

Given,

Nominal interest rate is 8%.

Real interest is3%.

Expected inflation is 5%.

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 4% for inflation rate as follows:

Real Interest Rate=8%−4%=4%

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

If the real inflation is 4%, then it means that the real interest paid by Mr. B is 4%. However, at the initial agreement (expected inflation 5%), he was paying only 3% as real interest.

This shows that Mr. B is worse off and Mr. L is better off.

b. When Real inflation Rate is 7%

The formula to calculate real interest rate is:

Real Interest Rate=Nominal Interest Rate −Inflation Rate

Substitute 8% for nominal interest rate and 7% for inflation rate as follows:

Real Interest Rate=8%−7%=1%

If the real inflation is 7%, then it means that real interest paid by Mr. B is 1%. However, at the initial agreement (at 5% expected inflation), he was paying 3% as real interest.

This shows that Mr. B is better off and Mr. L is worseoff because now the real interest paid by Mr. B is less than earlier.

Answer 12

Ch. 10.A - Prob. 1P Ch. 10.A - Prob. 2P Ch. 10.A - Prob. 3P Ch. 10 - Prob. 1QFT Ch. 10 - Prob. 2QFT Ch. 10 - Prob. 3QFT Ch. 10 - Prob. 1P Ch. 10 - Prob. 2P Ch. 10 - Prob. 3P Ch. 10 - Prob. 4P

Answer to Problem 10P

Explanation of Solution

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Chapter 10 Solutions