Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 33, Problem 2TY
To determine
The effect of a different real rate of interest on government bonds.
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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?
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 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?
Chapter 33 Solutions
Economics: Principles & Policy
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Similar questions
- Let's suppose if you have $200,000 in a bank term account. You earn 5% interest per annum from this account.You anticipate that the inflation rate will be 4% during the year. However, the actual inflation rate for the year is 6%. Calculate the impact of inflation on the bank term deposit you have and examine the effects of inflation in your city of residence with attention to food and accommodation expenses.arrow_forwardIn order to make up for the future loss in purchasing power. the rate at which you earn interest must be sufficiently higher than the anticipated inflation rate. True or false?arrow_forwardAssume the expected rate of inflation is 3 percent per year. What nominal interest rate should you charge to receive a real interest rate of 2 percent per year?arrow_forward
- You open a savings account with a 0.5% per year nominal interest rate, and the economy experiences 3% per year inflation. What is your nominal and real annual interest rate on the account? What will happen to the purchasing power of money you place in the account over time?arrow_forwardHow might a rapid rise in inflation harm you? How might a rapid rise in inflation help you? In answering this question consider your role as both a consumer, worker, and borrower. Consider the likely effect on your real wages, and any interest you receive as a saver. Would it be advantageous to borrow money if you expected inflation to rise? Does it make economic sense to open a savings account at a bank given the latest increase in the CPI.arrow_forwardWhy do you think the U.S. experience with inflation over the last 50 years has been so much milder than in many other countries?arrow_forward
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