Problem Illustration: (1 + nominal) 1 rreal Solving for the Real Rate of Interest (1 + inflation) You have managed to build up your savings over the three years following your graduation from college to a respectable P100,000 and are wondering how to invest it. Your banker says they could pay you 5% on your account for the next year. However, you recently saw on the news that the expected rate of inflation for next year is 3.5%. If you are earning a 5% annual rate of return but the prices of goods and services are rising at a rate of 3.5%, just how much additional buying power would you gain each year? Stated somewhat differently, what real rate of interest would you earn if you made the investment?
Problem Illustration: (1 + nominal) 1 rreal Solving for the Real Rate of Interest (1 + inflation) You have managed to build up your savings over the three years following your graduation from college to a respectable P100,000 and are wondering how to invest it. Your banker says they could pay you 5% on your account for the next year. However, you recently saw on the news that the expected rate of inflation for next year is 3.5%. If you are earning a 5% annual rate of return but the prices of goods and services are rising at a rate of 3.5%, just how much additional buying power would you gain each year? Stated somewhat differently, what real rate of interest would you earn if you made the investment?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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please explain to me these questions with the Answer. Thank you
![Determinants of Interest Rates
Problem Illustration:
(1 + nominal)
1
rreal
Solving for the Real Rate of Interest
(1 + inflation)
You have managed to build up your savings over the three years
following your graduation from college to a respectable P100,000
and are wondering how to invest it. Your banker says they could
pay you 5% on your account for the next year. However, you
recently saw on the news that the expected rate of inflation for
next year is 3.5%. If you are earning a 5% annual rate of return
but the prices of goods and services are rising at a rate of 3.5%,
just how much additional buying power would you gain each
year? Stated somewhat differently, what real rate interest
would you earn if you made the investment?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbaf2c834-e45d-4c6b-b33a-b6c31f7ce139%2F87dc8df7-cc09-4310-965b-e5e0321113a5%2F3gd8qbj_processed.png&w=3840&q=75)
Transcribed Image Text:Determinants of Interest Rates
Problem Illustration:
(1 + nominal)
1
rreal
Solving for the Real Rate of Interest
(1 + inflation)
You have managed to build up your savings over the three years
following your graduation from college to a respectable P100,000
and are wondering how to invest it. Your banker says they could
pay you 5% on your account for the next year. However, you
recently saw on the news that the expected rate of inflation for
next year is 3.5%. If you are earning a 5% annual rate of return
but the prices of goods and services are rising at a rate of 3.5%,
just how much additional buying power would you gain each
year? Stated somewhat differently, what real rate interest
would you earn if you made the investment?
![Determinants of Interest Rates
Problem Illustration:
Solving for the Nominal Rate of Interest
After considering a number of investment opportunities,
you have decided that you should be able to earn a real
return of 2% on your P100,000 in savings over the
coming year. If the expected rate of inflation is expected
to be 3.5% over the coming year, what nominal rate of
return must you anticipate in order to earn the 2% real
rate of return?
Nominal rate= (1 + Real rate) + (1 + Inflation rate) - 1
= Real rate + Inflation rate + ( Real rate x Inflation rate)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbaf2c834-e45d-4c6b-b33a-b6c31f7ce139%2F87dc8df7-cc09-4310-965b-e5e0321113a5%2Fl4ifg58_processed.png&w=3840&q=75)
Transcribed Image Text:Determinants of Interest Rates
Problem Illustration:
Solving for the Nominal Rate of Interest
After considering a number of investment opportunities,
you have decided that you should be able to earn a real
return of 2% on your P100,000 in savings over the
coming year. If the expected rate of inflation is expected
to be 3.5% over the coming year, what nominal rate of
return must you anticipate in order to earn the 2% real
rate of return?
Nominal rate= (1 + Real rate) + (1 + Inflation rate) - 1
= Real rate + Inflation rate + ( Real rate x Inflation rate)
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