Economics (7th Edition) (What's New in Economics)
7th Edition
ISBN: 9780134738321
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 20, Problem 20.6.9PA
To determine
The real interest rate
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If you are a banker, should you consider the nominal or real interest rate when deciding which rate to charge for a loan? Explain in 250 words.
Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a real return of 4 percent per year.
Instructions: Enter your responses as whole numbers.
a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 105 in one year and 110.2 in two years. What
nominal rate of interest should Frank charge Sarah?
The nominal rate of interest charged should be
Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a real return of 3 percent per year.
Instructions: Enter your responses as whole numbers.
a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 111 in one year and 123.2 in two years. What
nominal rate of interest should Frank charge Sarah?
The nominal rate of interest charged should be
b. Suppose Frank and Sarah are unsure about what the CPI will be in two years. How should Frank index Sarah's annual repayments to
ensure that he gets an annual 3 percent rate of return?
Frank should charge Sarah
%.
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equal to
more than
less than
Chapter 20 Solutions
Economics (7th Edition) (What's New in Economics)
Ch. 20 - Prob. 20.1.1RQCh. 20 - Prob. 20.1.2RQCh. 20 - Prob. 20.1.3RQCh. 20 - Prob. 20.1.4RQCh. 20 - Prob. 20.1.5RQCh. 20 - Prob. 20.1.6RQCh. 20 - Prob. 20.1.7PACh. 20 - Prob. 20.1.8PACh. 20 - Prob. 20.1.9PACh. 20 - Prob. 20.1.10PA
Ch. 20 - Prob. 20.1.11PACh. 20 - Prob. 20.1.12PACh. 20 - Prob. 20.1.13PACh. 20 - Prob. 20.1.14PACh. 20 - Prob. 20.2.1RQCh. 20 - Prob. 20.2.2RQCh. 20 - Prob. 20.2.3RQCh. 20 - Prob. 20.2.4PACh. 20 - Prob. 20.2.5PACh. 20 - Prob. 20.2.6PACh. 20 - Prob. 20.2.7PACh. 20 - Prob. 20.2.8PACh. 20 - Prob. 20.3.1RQCh. 20 - Prob. 20.3.2RQCh. 20 - Prob. 20.3.3RQCh. 20 - Prob. 20.3.4PACh. 20 - Prob. 20.3.5PACh. 20 - Prob. 20.3.6PACh. 20 - Prob. 20.3.7PACh. 20 - Prob. 20.3.8PACh. 20 - Prob. 20.4.1RQCh. 20 - Prob. 20.4.3RQCh. 20 - Prob. 20.4.4PACh. 20 - Prob. 20.4.5PACh. 20 - Prob. 20.4.6PACh. 20 - Prob. 20.4.7PACh. 20 - Prob. 20.4.9PACh. 20 - Prob. 20.4.10PACh. 20 - Prob. 20.5.1RQCh. 20 - Prob. 20.5.2RQCh. 20 - Prob. 20.5.3PACh. 20 - Prob. 20.5.4PACh. 20 - Prob. 20.5.5PACh. 20 - Prob. 20.5.6PACh. 20 - Prob. 20.5.7PACh. 20 - Prob. 20.5.8PACh. 20 - Prob. 20.6.1RQCh. 20 - Prob. 20.6.2RQCh. 20 - Prob. 20.6.3RQCh. 20 - Prob. 20.6.4RQCh. 20 - Prob. 20.6.5PACh. 20 - Prob. 20.6.6PACh. 20 - Prob. 20.6.7PACh. 20 - Prob. 20.6.8PACh. 20 - Prob. 20.6.9PACh. 20 - Prob. 20.7.1RQCh. 20 - Prob. 20.7.3RQCh. 20 - Prob. 20.7.5RQCh. 20 - Prob. 20.7.6PACh. 20 - Prob. 20.7.8PACh. 20 - Prob. 20.7.9PACh. 20 - Prob. 20.1RDECh. 20 - Prob. 20.5RDECh. 20 - Prob. 20.7RDECh. 20 - Prob. 20.10RDECh. 20 - Prob. 20.11RDECh. 20 - Prob. 20.1CTECh. 20 - Prob. 20.2CTE
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- Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a real return of 3 percent per year. Instructions: Enter your responses as whole numbers. a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 111 in one year and 123.2 in two years. What nominal rate of interest should Frank charge Sarah? The nominal rate of interest charged should be b. Suppose Frank and Sarah are unsure about what the CPI will be in two years. How should Frank index Sarah's annual repayments to ensure that he gets an annual 3 percent rate of return? Frank should charge Sarah %. ✓ (Click to select) he inflation rate. equal to more than less thanarrow_forwardWhat is meant by the rate of interest. How is the rate of interest determined? Explain in 500 words.arrow_forwardWhat is the real interest rate?arrow_forward
- Assume that Sarah agrees to lend $100 to Sam for one year. Sam agrees to pay Sarah $117 at the end of the year. If inflation over that one year is 8%, what real rate of interest does Sarah earn on her $100?arrow_forwardFrank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a 2 percent real return per year. Instructions: Enter your responses as as whole numbers. a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 110 in one year and 121 in two years. What nominal rate of interest should Frank charge Sarah? The nominal rate of interest charged should be %. b. Suppose Frank and Sarah are unsure what the CPI will be in two years. How should Frank index Sarah's annual repayments to ensure that he gets an annual 2 percent real rate of return. Frank should charge Sarah) % (Click to select) the inflation rate.arrow_forwardExplain how higher savings leads to a higher standard of living.arrow_forward
- Suppose the nominal rate of interest on a savings account is 15%, the real rate of interest is 3%, and the tax rate on nominal interest is 20%. Which of the following is true? A saver would lose 9% real interest. A saver would neither gain nor lose real interest. A saver would earn 12% real interest. A saver would earn 2.4% real interest.arrow_forwardSuppose 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?arrow_forwardA family of four has an income of $15,000 today and will earn $24,000 tomorrow. If the family consumes $11,500 in the first period and $15,000 in the second period what is the interest rate?arrow_forward
- On January 1, 2012, Albert invested $2,000 at 5 percent interest per year for three years. The CPI (times 100) on January 1, 2012, stood at 100. On January 1, 2013, the CPI was 106; on January 1, 2014, it was 112; and on January 1, 2015, the day Albert's investment matured, the CPI was 117. Find the real rate of interest earned by Albert in each of the three years and his total real return over the three-year period. Assume that interest earnings are reinvested each year and themselves earn interest. Hint: Calculate inflation and real interest for each year and then calculate it for the three years as a whole. Instructions: Enter your responses rounded to one decimal place. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Year 2012 2013 2014 Real rate of interest Total real rate of return: -1% % % %.arrow_forwardQ. 18 Dave deposits $2000 into the bank as deposits in 2016. The bank promises him a nominal interest rate of 5% from 2016 to 2017. The basket of goods that David likes is 2 can of Coca-Cola and 5 hamburgers in both 2016 and 2017. What is the real interest rate that David gets based on the information provided in this question? Price in 2016 $5 $20 Price in 2017 Each can of Coca-Cola $5 Each Hamburger $25 A) +14.4% -22.73% +5% -5% - 14.4%arrow_forwardSuppose you make a loan of $100 that will be repaid to you in 1 year.if the loan is denominated in terms of nominal interest rate, are you happy or sad if inflation is higher than expected during the year. What if the loan instead had been denominated in terms of a real return.arrow_forward
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