Economics:
10th Edition
ISBN: 9781285859460
Author: BOYES, William
Publisher: Cengage Learning
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Question
Chapter 7, Problem 9E
To determine
The ways in which variable interest rate loans protect creditors from the effects of unprecedented inflation.
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In 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?
You are given a loan with a nominal interest rate of 5%. You must pay back this loan one year from now. Over the next year inflation is at 4%. In real terms what is the effective interest rate you must pay the loan back at after adjusting for inflation?
How might your personal inflation rate differ from the average inflation rate as measured by the Consumer Price Index?
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- if the nominal interest rate is 18 percent and the real interest rate is 10 percent, the inflation rate isarrow_forwardSuppose you have $150,000 in a bank term account. You earn 5% interest per annum from this account. You anticipate that the inflation rate will be 3% 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. ii. Examine the effects of inflation in your city of residence with attention to food and accommodation expenses. iii. The Australian Bureau of Statistics (ABS) reported in May 2016 that the civilian population in Australia over 15 years of age was 19.8 million. Of this population of 19.8 million Australians, 12.5 million were employed and 0.7 million were unemployed. Calculate Australia’s labor force and the number of people in the civilian population who were not in the labor force?arrow_forwardAn investment offers a total return of 13.8 percent over the coming year. You believe the total real return will be only 9.4 percent. What do you believe the exact inflation rate will be for the next year?arrow_forward
- Real interest rate is equal to Nominal Interest rate when inflation is 2% True/Falsearrow_forwardSuppose 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?arrow_forwardSuppose 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_forward
- Dean borrows $400 from Tim. Tim wants to make a 7% real return on his money, so they both agree on a 7% stated interest rate paid next year. Dean and Tim did not anticipate any inflation, yet the actual inflation turned out to be 2% next year. In this case, what is Tim’s real rate of return?arrow_forwardAn 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?arrow_forwardExamine the effects of inflation in attention to food and accommodation expenses.arrow_forward
- Calculate inflation if real interest rate is 12% and nominal interest rate is 15%arrow_forwardSuppose a person works hard at a job after graduation and after her first year, her effort is rewarded with a 3% raise when the average wage increase in her company is 2%. Later, the government releases its inflation report and says that the inflation rate is 7%. Given this information, which of the following is true regarding her standard of living? Her standard of living has improved because the 3% raise is enough to offset the average rise in prices. Her standard of living did not improve because the purchasing power of her income is less than it was last year. Her standard of living has remained the same because the rate of inflation does not influence purchasing power. Her standard of living has increased by the amount of inflation, namely, 7%.arrow_forward
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