Econ Macro (book Only)
6th Edition
ISBN: 9781337408745
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 7, Problem 9P
To determine
The effect of an increase in the expected inflation in the equilibrium in the loanable funds market.
Concept introduction:
Expected Inflation- This refers to the anticipated increase in the level of prices over a given period of time resulting from the subjective views about price trends in future. In other words, prices today are affected by what they may be tomorrow culminating into expected inflation.
Fisher Effect
In the late 1930s, U.S. economist Irving Fisher established an economic hypothesis
This implies that the nominal or the current interest rate is the real interest rate adjusted for the rate of inflation.
Expert Solution & Answer
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(Use this statement for pictures)
Initially, Megan earns a salary of $300 per year and Larry earns a salary of $200 per year. Megan lends Larry $100 for one year at an annual interest rate of 16% with the expectation that the rate of inflation will be 12% during the one-year life of the loan. At the end of the year, Larry makes good on the loan by paying Megan $116. Consider how the loan repayment affects Megan and Larry under the following scenarios.
correct the answers i picked out...
Inflation and interest rates
a) Define/explain the consumer price index. b)
Suppose that the nominal interest rate is 6.5%
per year and you borrow $200. How much
money will you have to repay in a year? c)
Suppose that the nominal interest rate is
again 6.5% and inflation is 1%. What is the real
interest rate? d) Now suppose that the
nominal interest rate is 1% and the inflation
rate is 1.5%. What is the real interest rate?
Would you like to be a lender or a borrower in
this case? Why?
Please explain/show how to do the
calculations
5. Calculate the one-year real rate of interest faced by the U.S. government given that
expected inflation is now 1.68%/year (Source: FRB-Cleveland) and the nominal one-
year U.S. Treasury rate is 0.15% (Source: Investing.com).
Chapter 7 Solutions
Econ Macro (book Only)
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- Table 2016 (Base Year) 2017 2018 Product Quantity Price Price Price Milk 30 $2.0 2.2 2.5 Bread 50 3.0 3.5 4.0 Assume the consumption basket has two products—bread and milk—with prices and quantities shown in the above table. Refer to Table. Suppose your income increased by 10 percent from 2017 to 2018. After adjusting for inflation, your purchasing power effectively _______ by about _______ from 2017 to 2018. Group of answer choices increased; 24% increased; 10% decreased; 26.1% decreased; 4.1%arrow_forwardTable 24-7 The table below lists the prices of chips and salsa for the year 2018, 2019, 2020. Assume that the typical consumer buys 8 bags of chips and 4 jars of salsa each month, and that 2019 is the base period. Year 2018 2019 2020 Price of Chips $2.50 $2.40 $2.60 Price of Salsa $2.50 $2.55 $2.75 Refer to Table 24-7. Calculate the inflation rate for 2020arrow_forwardThe following table shows the average nominal interest rates on six-month Treasury bills between 1997 and 2001, which determined the nominal interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 1997 to 2001. (All rates are rounded to the nearest tenth of a percent.) Nominal Interest Rate Inflation Fte Year (Percent) (Percent) 1997 5,2 2.3 1998 4.8 1.5 1999 4.8 2.2 2000 5.9 3.4 2001 3.4 2.8 Source: "FRED Economic Data," Federal Reserve Bank of St. Louis, last modified September 23, 2019, accessed September 24, 2019, https://fred.stlouisfed.org. On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 1997 to 2001. Next, use the green points (triangle symbol) to plot the real interest rates for those years.arrow_forward
- 4. Inflation and interest rates The following table shows the average nominal interest rates on six-month Treasury bills between 2004 and 2008, which determined the nominal interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 2004 to 2008. (All rates are rounded to the nearest tenth of a percent.) Year 2004 2005 2006 2007 2008 INTEREST RATE (Percent) 5.0 Source: "FRED Economic Data," Federal Reserve Bank of St. Louis, last modified September 23, 2019, accessed September 24, 2019, https://fred.stlouisfed.org. On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 2004 to 2008. Next, use the green points (triangle symbol) to plot the real interest rates for those years. 4.0 20 1.0 0 -1.0 -20 Nominal Interest Rate (Percent) 1.6 3.4 4.8 4.4 1.6 -3.0 2003 © 2004 © 2005 © 2006 © 2007 2004 O 2008 Inflation Rate (Percent) 2.7 3.4 3.2 2.9 2005 2006 YEAR 3.8…arrow_forwardQuestion 2 Imagine a loan contract with a nominal interest rate of 17 percent. The expected inflation at the time of loan origin was 8 percent, but the actual inflation is realized as 6 percent. a) What is the ex-ante real interest rate for this loan contract? b) What is the ex-post real interest rate for this loan contract? c) Who benefited from the realized inflation; the lender or the borrower? Why?arrow_forward4. In which of these situations is the real interest rate NEGATIVE? A) The nominal interest rate is 3% and the inflation rate is 4% B) The nominal interest rate is -5% and the inflation rate is -6% C) The nominal interest rate is 2% and the inflation rate is -1% D) The nominal interest rate is 4% and the inflation rate is 4%arrow_forward
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