Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506756
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 9, Problem 9CQ
To determine
Calculate the estimated real rate of interest and real
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Assume that Sarah agrees to lend $100 to Sam for
one year. Sam agrees to pay Sarah $117 at the end of
the year. If inflation over that one year is 8%, what
real rate of interest does Sarah earn on her $100?
You borrowed $200 and repaid $211 at the end of the year. During the year, inflation was 0.7%. What
was the real interest rate, in percent?
(Please use the Fisher effect to approximate your answer if appropriate.)
Round to one decimal place digit and do not enter the % sign. If your answer is 6.14%, enter 6.1. If your
answer is 6.16%, enter 6.2. If appropriate, remember to enter the-sign
4.8
Assume you just deposited $1,000 into a bank account. The current real interest rate is 2%, and inflation is expected to be 6% over the next year. What nominal rate would you require from the bank over the next year? How much money will you have at the end of one year? If you are saving to buy a fancy bicycle that currently sells for $1,050, will you have enough money to buy it?
Chapter 9 Solutions
Macroeconomics: Private and Public Choice (MindTap Course List)
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- Consider a 3.5 percent TIPS with an issue CPI reference of 185.6. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 193.5. For the interest payment in the middle of the year, the CPI was 195.1. Now, at the end of the year, the CPI is 199.6 and the interest payment has been made.What is the total return of the TIPS in dollars? What is the total return of the TIPS in percentage?arrow_forwardWage agreements and loan contracts are two types of multiperiod agreements that are important for economic growth. Suppose you sign a two-year job contract with Wells Fargo stipulating that you will receive an annual salary of $93,500 plus an additional 2% above that in the second year, to account for expected inflation. 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 1% rather than 2%, who will be hurt? Why?arrow_forwardAn investment had a nominal return of 10.6 percent last year. The inflation rate was 2.2 percent. What was the real return on the investment?arrow_forward
- You are earning 5.2% on a certificate of deposit. Inflation is running 3.5%. What is the real rate of return on your investment?arrow_forwardMary will earn $42,544 this year and $21,839 next year. The real interest rate is 15% between this year and next year; she can borrow or lend at this rate. She has no wealth at the start of this year and plans to finish next year having consumed everything she possibly can. She would like to consume the same amount this year as next year. The inflation rate is 0%. How much should Mary save?arrow_forwardSuppose you purchase a $1,500 TIPS on January 1, 2020. The bond carries a fixed coupon rate of 5.5 percent. Over the first two years, semiannual inflation is 1.5 percent, 1.5 percent, 4 percent, and 3 percent, respectively. What is the principal at the end of month 6?arrow_forward
- If inflation is currently 2.55% and a bank is lending money at 7.75% interest, what is the real interest rate the bank is earning on its loans?arrow_forwardSuppose the annual nominal interest rate on bank certificate of deposit is 12%. How much is the real interest rate if the inflation rate is 13%?arrow_forward
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