Question 1

Loretta agrees to lend Ted $500,000 to buy computers for his consulting firm.They agree to a nominal interest rate of 8%.Both expect the inflation rate to be 2%.
(a)Calculate the expected real interest rate.
(b)If inflation turns out to be 3% over the life of the loan,what is the real interest rate? Who gains from unexpectedly high inflation,Loretta or Ted?
(c)If inflation turns out to be 1% over the life of the loan,what is the real interest rate? Who gains from unexpectedly low inflation,Loretta or Ted?

Accepted Answer

The answer of Loretta agrees to lend Ted $500,000 to...

Question 2

Historical analysis of real interest rates in the United States shows that

Accepted Answer

Historical analysis shows that real interest rates were unusually low in the 1970s due to high inflation rates, but rose significantly in the 1980s as inflation was curbed by tight monetary policy. Therefore, real interest rates were unusually low in the 1970s and unusually high in the 1980s.

Question 3

If the expected inflation rate was 2.5%,the expected real interest rate was 4.0%,and the real interest rate turned out to be 5.1%,then the nominal interest rate equals

Accepted Answer

The nominal interest rate can be calculated using the Fisher equation, which is: nominal interest rate = real interest rate + inflation rate. Given the real interest rate turned out to be 5.1% and the expected inflation rate was 2.5%, the nominal interest rate equals 5.1% + 2.5% = 7.6%. However, none of the provided options match this calculation, suggesting a possible mistake in the question or answer choices. Based on the provided choices, the closest explanation is an understanding error, but strictly according to the given data and standard calculations, none of the options correctly match the calculated nominal interest rate of 7.6%.

Question 4

You took out a loan one year ago at a nominal interest rate of 7.5%.The CPI stood at 173.2 at the time and you expected it to rise to 178.6 over the year.Today the CPI is actually 179.5.Calculate the expected real interest rate on the loan and the real interest rate on the loan.

Accepted Answer

The answer of You took out a loan one year...

Question 5

If the expected inflation rate was 2.5%,the expected real interest rate was 4.0%,and the actual inflation rate turned out to be 3.2%,then the real interest rate equals

Accepted Answer

The real interest rate can be calculated using the formula: real interest rate = nominal interest rate - actual inflation rate. The nominal interest rate can be found by adding the expected inflation rate to the expected real interest rate (2.5% + 4.0% = 6.5%). Therefore, the real interest rate when the actual inflation rate is 3.2% is 6.5% - 3.2% = 3.3%, which rounds to approximately 3%.

Question 6

If the nominal interest rate on a one-year loan was 7%,the actual inflation rate over the year was 3% and the expected inflation rate over the year was 2.5%,then the expected real interest rate equals

Accepted Answer

The expected real interest rate is the nominal interest rate minus the expected inflation rate. In this case, the nominal interest rate is 7%, the expected inflation rate is 2.5%, so the expected real interest rate is 7% - 2.5% = 4.5%.

Question 7

By Marks buys a one-year German government bond (called a bund)for $400.He receives principal and interest totaling $436 one year later.During the year the CPI rose from 150 to 162,but he had thought the CPI would be at 159 by the end of the year.By Marks had expected the real interest rate to be ________,but it actually turned out to be ________.

Accepted Answer

The expected real interest rate is calculated based on the expected inflation rate, while the actual real interest rate is based on the actual inflation rate. Expected inflation was from 150 to 159, a 6% increase (9/150), and actual inflation was from 150 to 162, an 8% increase (12/150). By Marks received a 9% nominal return ($36 on a $400 investment). The expected real interest rate = nominal rate - expected inflation rate = 9% - 6% = 3%. The actual real interest rate = nominal rate - actual inflation rate = 9% - 8% = 1%.

Question 8

The nominal interest rate is 7%,today's price level is 150,and you expect the price level to be 156 one year from now.What is the expected inflation rate? What is the expected real interest rate?

Accepted Answer

The answer of The nominal interest rate is 7%,today's price...

Question 9

If the nominal interest rate on a one-year loan was 7%,the expected inflation rate over the year was 3% and the actual inflation rate over the year turned out to be 3.5%,then the expected real interest rate equals

Accepted Answer

The expected real interest rate can be calculated as follows:
Expected Real Interest Rate = Nominal Interest Rate - Expected Inflation Rate
= 7% - 3%
= 4%
However, since the actual inflation rate turned out to be 3.5%, the actual real interest rate is:
Actual Real Interest Rate = Nominal Interest Rate - Actual Inflation Rate
= 7% - 3.5%
= 3.5%
Therefore, the expected real interest rate was slightly higher than the actual real interest rate, which means that borrowers benefited slightly more than lenders from the inflation. Choice B is the closest to the expected real interest rate of 4%.

Question 10

If the expected inflation rate was 2.5%,the expected real interest rate was 4.0%,and the real interest rate turned out to be 5.1%,then the actual inflation rate equals

Accepted Answer

The actual inflation rate is equal to the real interest rate plus the expected inflation rate. In this case, the real interest rate is 5.1% and the expected inflation rate is 2.5%, so the actual inflation rate is 5.1% + 2.5% = 7.6%.

Quiz 2: The Measurement and Structure of the National Economy