Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 8, Problem 5RQ
To determine
The difference between the real and nominal interest rate and the perception behind Fisher’s equation.
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What is the diference between a real interest rate and a nominal interest rate?What is the intuition behind the Fisher equation?
Is an increase in real interest rate always proportional to an increase in the growth rate of money supply (long run)?
Describe the effects of a decrease in the interest rate on present and next period’s consumption if the individual is a net lender (i.e., has savings) after period 1 and the substitution effect is larger than the income effect. Show your answer graphically
Chapter 8 Solutions
Macroeconomics (Fourth Edition)
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- Q. 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_forwardWhy does inflation have a positive effect on the nominal interest rate?arrow_forwardWhat does this mean? "When drawn against the real interest rate, output supply increases if the labor supply is increasing in the interest rate."arrow_forward
- Which of the following statements are true, which are false? If an increase in the real interest rate leads to a higher level of consumption in both periods, this can be explained through (a) substitution effect of the real interest rate change; (b) income effect of the real interest rate change.arrow_forwardResearch suggests that macroeconomic factors can explain the dynamics of interest rates in the economy. Suppose we are interested in understanding whether inflation plays a role in explaining interest rates. Fitting a line between the current nominal interest rate i and current inflation we obtain: i = 0.041 -0.147 What is the expected level of interest rates when inflation is at the level of 4%?arrow_forwardAccording to our analysis of a worker's choice of how much to save for retirement using our model of consumer choice theory, which of the following will raise the relative price of future consumption? An increase in the inflation rate Both an increase in the inflation rate and an increase in the interest rate Neither an increase in the inflation rate nor an increase in the interest rate An increase in the interest ratearrow_forward
- Is the statement below true, false or uncertain? Explain your answer. Note: Include a diagram as part of your answer. "Asha is a borrower when the interest rate is 10% and a saver when the interest rate is 20%. A decrease in the interest rate from 20% to 10% may make Asha worse off. Assume the price of the good in each period is $1."arrow_forwardConsider a fictional price index, the College Student Price Index (CSPI), based on a typical college student’s annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2017, 2018, and 2019. The cost of each item in the basket and the total cost of the basket are shown for 2017. Perform these same calculations for 2018 and 2019, and enter the results in the following table.arrow_forward: According to the Fisher effect, how does an increase in the inflation rate affect the real interest rate and the nominal interest rate?arrow_forward
- Looking at business fixed investment, elaborate on why investment is negatively related to the interest rates.arrow_forwardAssume that the nominal interest rate is 8% in 2020, with inflation at 3%. a. According to the Fisher effect, what will happen to the nominal interest rate if inflation goes to 8%? b. If someone borrowed $1 million in 2020 at 8% (promising to pay $1,080,000 in one year) and paid back the loan one year later when inflation had unexpectedly gone to 8%, what would be the real interest rate on this loan?arrow_forward
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