Principles of Economics (MindTap Course List)
8th Edition
ISBN: 9781305585126
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 24, Problem 9PA
Subpart (a):
To determine
Nominal interest rate, real interest rate and inflation.
Subpart (b):
To determine
Nominal interest rate, real interest rate and inflation.
Subpart (c):
To determine
Nominal interest rate, real interest rate and inflation.
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Which of the following is the positive impact of inflation?
A) Inflation causes the real value of saving for a saving person to eroded.
B) Inflation makes debtors pay less in real return.
C) Fixed-income people have the same income but a high cost of living.
D) lender will not have the option to earn interest.
If my nominal wages go up 5% this year and inflation is 2% this year, what happened?
a) All of the choices are correct.
b) I experience an increase in my both my nominal income and in my real income.
c) My nominal wages increased more than the increase in the overall price level.
d) My real wages increased by approximately 3%
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 benefit you in paying back your student loans? Who is hurt more from unexpected higher inflation, a borrower or a lender ?
Chapter 24 Solutions
Principles of Economics (MindTap Course List)
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- Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan. a. What was the expected real interest rate? b. What was the actual real interest rate?arrow_forwardOn the way into school you hear the following report on the radio: "inflation for the month of February was 0.4%. Over the year inflation was 2.2%." Which of the following options best explains what these figures mean? Select one: a. Inflation in February was much slower than it was in other months from the past year. b. The prices of household necessities, excluded household luxuries, increased by 2.2%, compared to 12 months ago. c. The prices of the things a typical urban consumer buys, as estimated by the Bureau of Labor Statistics, increased on average 2.2%, compared to 12 months ago. d. The government increased prices by 2.2% over the past year in order to keep pace with production costs.arrow_forwardInflation is defined as increases in the average prices in the economy. The February 2022 inflation rate is 7.9% which is the highest in the last 40 years. Have you noticed the price increases in your daily life? What goods are increased by the most? and by how much? What do you think are the causes of the recent inflation? How do you cope with the inflation?arrow_forward
- Inflation represents the rate of increase of the average price of goods. If inflation decreases from 10% to 5%, does the average price of goods decrease? Explain.arrow_forwardMark Lai, a student of agricultural science in the developing country Mikatra, notes that the demand for rice increased substantially over the last ten years. He attributes this to the substantial growth in population during this period. Although rice cultivation in Mikatra is still labor-intensive, Mark observes that the inflation-adjusted wages for farm workers in the rice industry have more or less remained constant during this period, even though the supply of rice increased. This was contrary to Mark's expectations as inflation in Mikatra during this period was not very high. Which of the following, if true, is most likely to explain this outcome? A.Rice and other cereals form a smaller proportion of the food budget of higher-income individuals. B.The government of another major rice-producing country, Langun, subsidizes its rice farmers to keep its prices competitive in the global market. C.The government of Mikatra has recently set a price floor in the wheat market. D.Following…arrow_forwardIf borrowers and lenders anticipate that the rate of inflation will be 5%, but instead it turns out to be 3%, which of the following is likely to occur? Select one: a. The real interest rate is higher than expected. b. Lenders wish that they had made fewer loans. c. Borrowers wish that they had borrowed more money. d. Insufficient loans will have been made by lenders to maintain profit levels.arrow_forward
- Let's say the inflation rate in an economy turns out to be higher than expected. Will the following people, or bank, be affected? Helped, hurt, or unaffected? a. Someone keeping a large quantity of cash in a shoe box in their closet. b. A bank lending money at a fixed rate of interest c. A union member with a COLA wage contract d. A person who is not due to receive a pay raise for another 11 monthsarrow_forwardhow important is the inflation for the common people in the community? explain.arrow_forwardSuppose two parties agree that the expected inflation rate for the next year is 6 percent. Based on this, they enter into a loan agreement where the nominal interest rate to be charged is 6 percent. If inflation for the year turns out to be 4 percent, who gains and who loses? Instructions: Enter your responses as whole numbers. The ex ante real interest rate is 10 percent. This is what borrowers think they are paying and lenders think they are earning. With the actual inflation of 4 percent, the ex post real interest rate will be percent.arrow_forward
- Suppose you borrow $100 from a bank at 5 percent interest for 1 year and the inflation rate that year is 10 percent. Was this loan advantageous to you or the bank?arrow_forwardIdentify how each of the following individuals is influenced by unexpected inflation. a. A sales representative paid a set percentage commission based on the dollar value of her sales is (Click to select) due to unexpected inflation. b. A financial investor who lives off income made from buying and selling mortgaged commercial property is (Click to select) due to unexpected inflation. c. A retiree who lives on interest payments from his bank deposits is (Click to select) due to unexpected inflation. d. A storekeeper whose costs and revenues both rise by inflation is [ (Click to select)) due to unexpected inflation. e. A person who lives off income made buying and selling items on online auction sites is (Click to select) due to unexpected inflation. f. A worker with a union contract that incorporates partial indexation of her wage i ✓ (Click to select) due to unexpected inflation. unaffected better off worse offarrow_forwardExplain the effects of inflation on various groups of people in the society.arrow_forward
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