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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Problem 3 You are given the following demand for European luxury automobiles: Q=1,000 P-0.5.2/1.6 where P-Price of European luxury cars PA = Price of American luxury cars P, Price of Japanese luxury cars I= Annual income of car buyers Assume that each of the coefficients is statistically significant (i.e., that they passed the t-test). On the basis of the information given, answer the following questions 1. Comment on the degree of substitutability between European and American luxury cars and between European and Japanese luxury cars. Explain some possible reasons for the results in the equation. 2. Comment on the coefficient for the income variable. Is this result what you would expect? Explain. 3. Comment on the coefficient of the European car price variable. Is that what you would expect? Explain.

Problem 2: A manufacturer of computer workstations gathered average monthly sales figures from its 56 branch offices and dealerships across the country and estimated the following demand for its product: Q=+15,000-2.80P+150A+0.3P+0.35Pm+0.2Pc (5,234) (1.29) (175) (0.12) (0.17) (0.13) R²=0.68 SER 786 F=21.25 The variables and their assumed values are P = Price of basic model = 7,000 Q==Quantity A = Advertising expenditures (in thousands) = 52 P = Average price of a personal computer = 4,000 P. Average price of a minicomputer = 15,000 Pe Average price of a leading competitor's workstation = 8,000 1. Compute the elasticities for each variable. On this basis, discuss the relative impact that each variable has on the demand. What implications do these results have for the firm's marketing and pricing policies? 2. Conduct a t-test for the statistical significance of each variable. In each case, state whether a one-tail or two-tail test is required. What difference, if any, does it make to…

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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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

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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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

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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