Question 1

If the ex-post real interest rate is 5 percent and actual inflation rate is 2 percent, the nominal interest rate is
A)7 percent.
B)3 percent.
C)2.5 percent.
D)2 percent.

Accepted Answer

The nominal interest rate can be calculated by adding the actual inflation rate to the ex-post real interest rate. Therefore, the nominal interest rate is 7 percent (5 percent + 2 percent).

Question 2

What is the real present value of $5,202 to be received after two years if the expected rate of inflation over the next two years is 2 percent ?
A)​$5,000
B)$4,105
C)​$4,807
D)​$5,100

Accepted Answer

The real present value accounts for the effect of inflation on the future value of money. To find the real present value of $5,202 received after two years with an inflation rate of 2%, we discount the future amount by the inflation rate for each year. The formula for real present value is PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the inflation rate, and n is the number of years. Plugging in the values: PV = $5,202 / (1 + 0.02)^2 = $5,202 / 1.0404 ≈ $5,000.

Question 3

If the expected inflation rate was 7 percent and the actual inflation rate was 3 percent, then
A)borrowers gained in real terms at the expense of lenders.
B)lenders gained in real terms at the expense of borrowers.
C)borrowers and lenders were not affected.
D)the government gained because it collected more in taxes.

Accepted Answer

When expected inflation is higher than actual inflation, lenders gain in real terms at the expense of borrowers. This is because borrowers will pay back their loans with money that has less purchasing power than the money they borrowed, while lenders will receive payments that have greater purchasing power than the money they originally lent out.

Question 4

Suppose you bought an inflation-indexed security for $12,000 in January 2013 which pays an annual interest of 4 percent.If the value of the inflation index in January 2013 was 106 and its value in January 2014 was 105, what is the value of the inflation-adjusted principal?
A)$12,114.29
B)​$11,342.58
C)​$8,000.60
D)​$13,126.41

Accepted Answer

The inflation-adjusted principal is calculated by adjusting the original principal amount according to the change in the inflation index. Since the inflation index decreased from 106 to 105, this indicates deflation rather than inflation. However, inflation-indexed securities typically have a feature that protects the principal from deflation, meaning the principal amount cannot decrease below its original value due to deflation. Therefore, the principal remains $12,000, and the interest for one year at 4% is $480 ($12,000 * 0.04). The total value, without adjusting for a decrease in the inflation index (since the principal does not decrease in value), is $12,480. However, none of the provided options match this calculation directly, suggesting a misunderstanding in the calculation process or a misinterpretation of the options. Given the options and the context, the correct approach to find the inflation-adjusted principal would involve understanding that the principal does not decrease but rather the interest calculation might be considered in the context of the options provided. The correct answer, based on the options and understanding that the principal should not decrease due to deflation, seems to be a misunderstanding in the explanation process, as none of the options directly reflect the simple interest calculation provided. The correct calculation should consider the adjustment based on the inflation rate, but with the given decrease in the inflation index, the principal's adjustment would not decrease it below its original amount. The correct answer, considering the misunderstanding, should reflect the original principal plus any adjustments for inflation, but in this case, the adjustment does not decrease the principal. The explanation mistakenly calculates simple interest without directly addressing the inflation adjustment as per the options provided.

Question 5

Another name for the expected real interest rate is the
A)securitized real interest rate.
B)realized real interest rate.
C)ex-post real interest rate.
D)ex-ante real interest rate.

Accepted Answer

The expected real interest rate is the ex-ante real interest rate, as it is the anticipated rate based on market expectations and not yet realized.

Question 6

For every dollar's worth of goods and services bought today, the amount of money it will take in N years to buy the same amount of goods and services when the average future inflation rate is p^eis called the______ . A)realized inflation discount factor. B)future inflation discount factor. C)future-augmented inflation factor. D)past-adjusted inflation factor.

Accepted Answer

The concept described in the question is that of future inflation, meaning that the inflation rate is expected to change in the future. The term "discount factor" refers to the present value of future cash flows, which in this case represents the current value of money necessary to buy the same amount of goods and services in N years. Therefore, the correct term for this measure is the future inflation discount factor. Option A is incorrect as there is no mention of realized inflation, option C is incorrect as "future-augmented inflation factor" is not a commonly used term, and option D is also incorrect as there is no mention of adjusting for past inflation rates.

Question 7

The nominal interest rate adjusted for actual inflation is the
A)expected real interest rate.
B)realized real interest rate.
C)after-tax real interest rate.
D)yield curve.

Accepted Answer

The realized real interest rate is the nominal interest rate adjusted for actual inflation, reflecting the true return on an investment after accounting for the inflation experienced over the investment period.

Question 8

For every dollar's worth of goods and services bought at an earlier date, the amount of money it would take now to buy the same amount of goods and services after N years of inflation at rate p is called the inflation______ discount factor. 
A)future
B)realized
C)expected
D)past

Accepted Answer

The discount factor is based on the past inflation rate. It measures the decreased value of money over time and is used to compare the purchasing power of money over different time periods. Therefore, the answer is past.

Question 9

If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out  to be 2 percent, then the realized real interest rate is _____than the expected real interest rate and borrowers______relative to lenders. 
A)less; gain
B)less; lose
C)greater; gain
D)greater; lose

Accepted Answer

The expected real interest rate is the nominal rate minus the expected inflation rate (6% - 4% = 2%). The realized real interest rate is the nominal rate minus the actual inflation rate (6% - 2% = 4%). Since 4% is greater than 2%, the realized real interest rate is greater than the expected real interest rate, and borrowers lose relative to lenders because they pay more in real terms than expected.

Question 10

If the expected inflation rate is 3 percent, the nominal interest rate is 5 percent, and the actual inflation rate turns out to be 4 percent, then the realized real interest rate is_____than the expected real interest rate and borrowers_____ relative to lenders. 
A)less; gain
B)less; lose
C)greater; gain
D)greater; lose

Accepted Answer

The realized real interest rate is lower than expected because the actual inflation was higher than expected, reducing the real value of the interest. Borrowers gain because they repay their loans with money that is worth less than anticipated.

Question 11

The real interest rate is the nominal interest rate adjusted for expected or actual
A)unemployment.
B)production.
C)income growth.
D)inflation.

Accepted Answer

The real interest rate is the nominal interest rate adjusted for inflation. This adjustment takes into account the shrinking or expanding value of money over time. To calculate the real interest rate, we subtract the inflation rate from the nominal interest rate. For example, if the nominal interest rate on a loan is 8% and the inflation rate is 3%, the real interest rate would be 5%.

Question 12

If the nominal interest rate was 4 percent, the expected real interest rate was 3 percent, and the realized real interest rate was 5 percent, then the expected inflation rate was ______and the realized inflation rate was_____ .
A)?1 percent; 1 percent
B)?1 percent; 2 percent
C)1 percent; ?1 percent
D)1 percent; 1 percent

Accepted Answer

The expected inflation rate is the nominal rate minus the expected real rate (4% - 3% = 1%). The realized inflation rate is the nominal rate minus the realized real rate (4% - 5% = -1%).

Question 13

The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the
A)expected real interest rate.
B)realized real interest rate.
C)after-tax real interest rate.
D)nominal interest rate.

Accepted Answer

The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the nominal interest rate. The other options are not applicable in this context. The expected real interest rate takes into account inflation, the realized real interest rate considers the actual return after adjusting for inflation, and the after-tax real interest rate factors in the effect of taxes on the return.

Question 14

The price of a certain amount of goods and services a year back was $200.If price increased by 4 percent during the year, how much money is required to buy the same amount of goods today?
A)$208
B)$204
C)$400
D)$404

Accepted Answer

The price increased by 4 percent, so the new price is 200 + (4% of 200) = 200 + (0.04 * 200) = 200 + 8 = $208.

Question 15

Another name for the realized real interest rate is the
A)securitized real interest rate.
B)expected real interest rate.
C)ex-post real interest rate.
D)ex-ante real interest rate.

Accepted Answer

The realized real interest rate is the actual or observed real interest rate that has been earned or paid on an investment or loan over a specific period in the past. It is referred to as the ex-post real interest rate because it is calculated after the fact.

Question 16

The nominal interest rate adjusted for expected inflation is the
A)expected real interest rate.
B)realized real interest rate.
C)after-tax real interest rate.
D)yield curve.

Accepted Answer

The nominal interest rate adjusted for expected inflation is the expected real interest rate. This is because the expected inflation rate is subtracted from the nominal interest rate to obtain the real interest rate, which reflects the actual purchasing power of the interest earned.

Question 17

From 1972 to 1974, the expected real interest rate on short-term bonds averaged about +2 percent, but the realized real interest rate averaged about −2 percent.The main reason for the difference was that
A)actual inflation was about 4 percentage points lower than expected inflation.
B)actual inflation was about 4 percentage points higher than expected inflation.
C)a monopoly cornered the market on short-term bonds.
D)nominal rate of interest was zero.

Accepted Answer

The realized real interest rate averaging −2 percent implies that the nominal interest rate was lower than expected inflation, resulting in a negative real interest rate. Therefore, actual inflation was about 4 percentage points higher than expected inflation.

Question 18

If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then
A)borrowers gained in real terms at the expense of lenders.
B)lenders gained in real terms at the expense of borrowers.
C)borrowers and lenders were not affected.
D)the government lost because it collected less in taxes.

Accepted Answer

Borrowers gained in real terms because they borrowed money at a fixed nominal interest rate based on the expected inflation rate of 4 percent, but the actual inflation rate was higher at 6 percent. Therefore, they paid back their loans with money that was worth less in real terms than what they borrowed. Lenders, on the other hand, received fixed nominal interest payments which did not account for the higher inflation rate and, thus, lost out in real terms.

Question 19

$\text { Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you } \$ 1,500 \text { in real (inflation- }$adjusted) terms in one year.The nominal interest rate is 4 percent and the expected inflation rate is 2 percent.What is the present value of the bond? (Round off your answer to the nearest dollar and pick the answer closest to the one you calculate.)
A)$1,415
B)$1,442
C)$1,471
D)$1,530

Accepted Answer

The real interest rate is approximately the nominal rate minus the inflation rate, which is 4% - 2% = 2%. The present value is calculated using the formula: $ PV = \frac{FV}{(1 + r)^n} $, where $ FV = 1500 $, $ r = 0.02 $, and $ n = 1 $. Thus, $ PV = \frac{1500}{1.02} \approx 1471 $.

Question 20

John bought an inflation-indexed security for $10,000 in January 2014.The security promises an annual interest rate of 5 percent and makes payments twice a year.If the value of the inflation index in January 2014 was 106 and its value in July 2014 was 105, John will receive an interest income of______ .
A)?$504.76
B)?$226.40
C)?$182.72
D)$368.56

Accepted Answer

To calculate the interest income, we need to first calculate the adjusted principal amount using the inflation indexes:

Adjusted principal in July 2014 = (106/105) * $10,000 = $10,047.62

Then, we can use the formula for semi-annual interest payments:

Interest income = (adjusted principal amount) * (interest rate/2)

= $10,047.62 * (0.05/2)

= $504.76

Therefore, the correct answer is A) $504.76.

Quiz 6: Real Interest Rates

If the ex-post real interest rate is 5 percent and actual inflation rate is 2 percent, the nominal interest rate is

What is the real present value of $5,202 to be received after two years if the expected rate of inflation over the next two years is 2 percent ?

If the expected inflation rate was 7 percent and the actual inflation rate was 3 percent, then

Suppose you bought an inflation-indexed security for $12,000 in January 2013 which pays an annual interest of 4 percent.If the value of the inflation index in January 2013 was 106 and its value in January 2014 was 105, what is the value of the inflation-adjusted principal?

Another name for the expected real interest rate is the

For every dollar's worth of goods and services bought today, the amount of money it will take in N years to buy the same amount of goods and services when the average future inflation rate is p^eis called the______ .

The nominal interest rate adjusted for actual inflation is the

For every dollar's worth of goods and services bought at an earlier date, the amount of money it would take now to buy the same amount of goods and services after N years of inflation at rate p is called the inflation______ discount factor.

If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out to be 2 percent, then the realized real interest rate is _than the expected real interest rate and borrowers__relative to lenders.

If the expected inflation rate is 3 percent, the nominal interest rate is 5 percent, and the actual inflation rate turns out to be 4 percent, then the realized real interest rate is_than the expected real interest rate and borrowers_ relative to lenders.

The real interest rate is the nominal interest rate adjusted for expected or actual

If the nominal interest rate was 4 percent, the expected real interest rate was 3 percent, and the realized real interest rate was 5 percent, then the expected inflation rate was __and the realized inflation rate was_ .

The amount of interest paid on a debt security in dollar terms as a percent of the principal is referred to as the

The price of a certain amount of goods and services a year back was $200.If price increased by 4 percent during the year, how much money is required to buy the same amount of goods today?

Another name for the realized real interest rate is the

The nominal interest rate adjusted for expected inflation is the

From 1972 to 1974, the expected real interest rate on short-term bonds averaged about +2 percent, but the realized real interest rate averaged about −2 percent.The main reason for the difference was that

If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then