You are thinking about building a new mall. Your trusted economic consultants say the mall will bring a 7 percent real rate of return. Because you know that you can borrow the necessary money at 5 percent, you will build the mall only if you expect inflation to remain below 2 percent. you will definitely build the mall. you will build the mall, unless you expect inflation to rise above 12 percent. you will build the mall, so long as you expect inflation to remain below 7 percent. you will build the mall, so long as you expect inflation to remain below 5 percent.

You are thinking about building a new mall. Your trusted economic consultants say the mall will bring a 7 percent real rate of return. Because you know that you can borrow the necessary money at 5 percent, you will build the mall only if you expect inflation to remain below 2 percent. you will definitely build the mall. you will build the mall, unless you expect inflation to rise above 12 percent. you will build the mall, so long as you expect inflation to remain below 7 percent. you will build the mall, so long as you expect inflation to remain below 5 percent.

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter13: Inflation

Section: Chapter Questions

Problem 12SQ

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Similar questions

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?
You take out student loans to help pay for your degree at a 5% annual interest rate. Assume the bank expected inflation to average 3% per year. What real interest rate did they expect to earn from your loan? What happens if inflation is actually 5% per year? Who is better off if inflation is higher than expected? What if it is lower than expected? Why?
An investment offers a 12% total return over the coming year. Bill Morneau thinks the total real return on this investment will be only 7%. What does Morneau believe the inflation rate will be over the next year?
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?
Suppose 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?
Suppose, you are planning to put away $20,000 of your savings for one year. You have the following options: 1.) Buy an indexed savings bond that earns 6.50% interest rate for the next year or, 2.) Buy a non-indexed savings bond that earns 11.00% interest rate for the next year. The inflation rate for the next year is expected to be 4.50%. Which option will you choose for the next year? OA. The non-indexed bond should be chosen as it pays a higher rate of interest. OB. The rate of inflation should not play a role in making this decision. OC. It does not matter whether the indexed or the non-indexed bonds are chosen, since they pay the same real rate of interest. D. The indexed bond option should be chosen as it protects from inflation.
Your parents have given you $2,500 a year before your graduation so that you can take a trip when you graduate. You wisely decide to invest the money in a bank CD that pays 8% interest. You know that the trip costs $2,600 right now and that inflation for the year is predicted to be 3%. Will you have enough money in a year to purchase the trip? Show your calculations.
Hyperinflation has struck your country! The economy is experiencing 1.41% inflation every minute. Your boss has just paid you $710 for your work that day, and you need to spend it fast before it loses its value. It takes you 24 minutes to get to the store, pick your items, and go to the register. Adjust the $710 for the inflation that has occurred over the 24 minutes to find your real wage for the day at the time you were paid. Hint #1: If there was 5% inflation, and I wanted to adjust $100 to its value before the inflation occurred, I would divide by 1.05. Hint #2: The growth formula is (1 + i)^t Do not round until your final answer, at which point you may round to two decimal places.
a)Suppose you earn a 3% wage increase from your employer. Then, the government releases economic data indicating the inflation rate is running at 5%. Are you better off? Based upon changes in your real wages, did your standards of living improve ? b) suppose you took out 20,000 in student loans at a fixed interest rate of 5%. Assume that after you graduate, inflation rises significantly as you are paying back your loans. Does this rise in inflation benefits you in paying back your student loans? Who hurt more from unexpected higher inflation, a borrower or a lender? c) in January 1980 the CPI stood at 77.8. By January 2006 the CPI was 198.3. By what percent have consumer prices increased over this period? Assume college graduates entering the job market in 1980 were being paid on average $1200 per month. Assume college graduates entering the job market in 2006 were being paid on average $3000 per month. Are the newer graduates paid more or less in real terms?
Consider a telephone call to London that currently would cost $5. If the real price oftelephone calls does not change in the future, how much will it cost you to make a call to London in 50 years if the inflation rate is 5% (roughly its average over the past 30 years)? What if inflation is 10%.
Inflation is expected to be 3% in the coming year. If Mr. Gonza earned $45,000 this year, how much must he earn in the following year to keep up with inflation and maintain a balance between his income and his increasing expenditures? (Show all work.)
Suppose that Lisa lends Alex $1,000, which Alex must repay after one year with an interest payment of 10%. When Lisa lends money to Alex, she expects that the inflation rate over the year will be 3%. However, after she lends the money, the actual inflation rate for the year turns out to be 5%. In this scenario, who gains from the higher than expected inflation rate?