Macroeconomics: Principles and Policy (MindTap Course List)
13th Edition
ISBN: 9781305280601
Author: William J. Baumol, Alan S. Blinder
Publisher: Cengage Learning
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Chapter 6, Problem 6TY
To determine
To ascertain the gain or loss when inflation is turned out to be lower than expected.
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Wage agreements and loan contracts are two types of multiperiod agreements that are important for economic growth. Suppose you sign a two-year job contract with Wells Fargo stipulating that you will receive an annual salary of $93,500 plus an additional 2% above that in the second year, to account for expected inflation.
If the inflation rate turns out to be 3% rather than 2%, who will be hurt? Why?
If the inflation rate turns out to be 1% rather than 2%, who will be hurt? Why?
Suppose you take out a loan for school this year for $4500. The bank expects that the rate of inflation for next year will equal 2%. You and the bank agree that in one year's time, you will pay back the full amount at an interest rate of 6%. Next year though, there is a sudden rise in inflation, causing inflation to equals 7%. How much will you pay back in one year?
Suppose two parties agree that the expected
inflation rate for the next year is 3 percent. Based
on this, they enter into a loan agreement where
the nominal interest rate to be charged is 7
percent. If inflation for the year turns out to be 2
percent, who gains and who loses
Chapter 6 Solutions
Macroeconomics: Principles and Policy (MindTap Course List)
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- Assume you just deposited $1,000 into a bank account. The current real interest rate is 2%, and inflation is expected to be 6% over the next year. What nominal rate would you require from the bank over the next year? How much money will you have at the end of one year? If you are saving to buy a fancy bicycle that currently sells for $1,050, will you have enough money to buy it?arrow_forwardYou are given a loan with a nominal interest rate of 5%. You must pay back this loan one year from now. Over the next year inflation is at 4%. In real terms what is the effective interest rate you must pay the loan back at after adjusting for inflation?arrow_forwardSuppose a person works hard at a job after graduation and after her first year, her effort is rewarded with a 3% raise when the average wage increase in her company is 2%. Later, the government releases its inflation report and says that the inflation rate is 7%. Given this information, which of the following is true regarding her standard of living? Her standard of living has improved because the 3% raise is enough to offset the average rise in prices. Her standard of living did not improve because the purchasing power of her income is less than it was last year. Her standard of living has remained the same because the rate of inflation does not influence purchasing power. Her standard of living has increased by the amount of inflation, namely, 7%.arrow_forward
- You open a savings account with a 0.5% per year nominal interest rate, and the economy experiences 3% per year inflation. What is your nominal and real annual interest rate on the account? What will happen to the purchasing power of money you place in the account over time?arrow_forwardSuppose that you also take out a $1,000 loan at the Cavalier Credit Union. The loan agreement stipulates that you must pay it back with 4% interest in one year, and again, the inflation rate is expected to be 2%. If the inflation rate turns out to be 3% rather than 2%, who will be hurt? Why? If the inflation rate turns out to be 3% rather than 2%, who will be helped? Why?arrow_forwardIn order to make up for the future loss in purchasing power. the rate at which you earn interest must be sufficiently higher than the anticipated inflation rate. True or false?arrow_forward
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