Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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Textbook Question
Chapter 19, Problem 29P
The “prime” interest rate is the rate that banks charge their best customers. Based on the nominal interest rates and inflation rates in Table 19.10, in which of the years would it have been best to be a lender? Based on the nominal interest rates and inflation rates in Table 19.10, in which of the years given would it have been best to be a borrower?
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The nominal rate of interest is the difference between the real rate and the expected rate of inflation.
Why is it important that the rate at which we earn interest should be higher than the inflation rate
The following table shows the average nominal interest rates on six-month Treasury bills between 2014 and 2018, 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 2014 to 2018. (All rates are rounded to the nearest tenth of a percent.)
Year Nominal Interest Rate Inflation Rate
(Percent) (Percent)
2014 0.1 1. 6
2015 0.2 0.1
2016 0.5 1.3
2017 1.1 2.1
2018 2.1 2.4
On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 2014 to 2018. Next, use the green points (triangle symbol) to plot the real interest rates for those years.
According to the table, in which year did buyers of six-month Treasury…
Chapter 19 Solutions
Principles of Economics 2e
Ch. 19 - Country A has export sales of 20 billion,...Ch. 19 - Which of the following are included in GDP, and...Ch. 19 - Using data from Table 19.5 how much of the nominal...Ch. 19 - Without looking at Table 19.7, return to Figure...Ch. 19 - According to Table 19.7, how often have recessions...Ch. 19 - According to Table 19.7, how long has the average...Ch. 19 - According to Table 19.7, how long has the average...Ch. 19 - Is it possible for GDP to rise while at the same...Ch. 19 - The Central African Republic has a GDP of...Ch. 19 - Explain briefly whether each of the following...
Ch. 19 - What are the main components of measuring GDP with...Ch. 19 - What are the main components of measuring GDP with...Ch. 19 - Would you usually expect GDP as measured by what...Ch. 19 - Why must you avoid double counting when measuring...Ch. 19 - What is the difference between a series of...Ch. 19 - How do you convert a series of nominal economic...Ch. 19 - What are typical GDP patterns for a high-income...Ch. 19 - What are the two main difficulties that arise in...Ch. 19 - List some of the reasons why economists should not...Ch. 19 - U.S. macroeconomic data are among the best in the...Ch. 19 - What does GDP not tell us about the economy?Ch. 19 - Should people typically pay more attention to...Ch. 19 - Why do you suppose that U.S. GDP is so much higher...Ch. 19 - Why do you think that GDP does not grow at a...Ch. 19 - Cross country comparisons of GDP per capita...Ch. 19 - Why might per capita GDP be only an imperfect...Ch. 19 - How might you measure a green GDP?Ch. 19 - Last year, a small nation with abundant forests...Ch. 19 - The prime interest rate is the rate that banks...Ch. 19 - A mortgage 105m is a loan that a person makes to...Ch. 19 - Ethiopia has a GDP of 8 billion (measured in U.S....Ch. 19 - In 1980, Denmark had a GDP of 70 billion (measured...Ch. 19 - The Czech Republic has 3 GDP of 1,800 billion...
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Similar questions
- how are borrowers and lenders affected when the nominal rate is 9%, the inflation premiums on loans is 3% and the actual rate of inflation is 4%arrow_forwardSuppose I lend my friend Peter $100 for one year, and he agrees to repay me with interest. We each have an expectation that the inflation rate over the coming year will be 5 percent, and so we agree that he will pay me back at a nominal rate of 7 percent interest. a) What real rate of return do I expect to receive? b) What happens if inflation turns out to be 8 percent over the year? Who is made better off and who is made worse off? c) What happens if inflation turns out to be 3 percent over the year? Who is made better off and who is made worse off?arrow_forwardThe following table shows the average nominal interest rates on six-month Treasury bills between 1971 and 1975, 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 1971 to 1975. (All rates are rounded to the nearest tenth of a percent.) Year 1971 1972 1973 1974 1975 INTEREST RATE (Percent) Source: "Economic Report of the President (2007)," United States Government Printing Office, last modified February 1, 2007, accessed March 11, 2013, http://www.gpo.gov/fdsys/pkg/ERP-2007/pdf/ERP-2007.pdf. On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 1971 to 1975. Next, use the green points (triangle symbol) to plot the real interest rates for those years. 8.0 7.0 6.0 5.0 4.0 1.0 -1.0 -2.0 -3.0 Nominal Interest Rate (Percent) 4.5 4.5 7.2 7.9 6.1 -4.0 1970 1971 1972 1973 1974 1971 1975 Inflation Rate (Percent) 4.4 3.2 6.2 11.0…arrow_forward
- Production and Growth Describe the difference between nominal interest rate and real interest rate?arrow_forwardSuppose that an economy starts with a net foreign asset to GDP ratio (NFA/Y) equal to -30%. After one year, the real interest rate (difference between the nominal interest rate and the inflation rate) has been -10%. What will the NFA/Y ratio become after this year due to this effect? Give your answer with two decimal places.arrow_forwardSuppose the nominal interest rate is 0.64 and the expected inflation rate is 0.47 1) What is the exact real interest rate? 2) What is the approximate real interest rate?arrow_forward
- Distinguish between the market interest and the inflation rate?arrow_forwardJay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan. a. What was the expected real interest rate? b. What was the actual real interest rate?arrow_forwardSuppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.Is the real interest rate on this loan higher or lower than expected?Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?Inflation during the 1970s was much higher than most people had expected when the decade began. How did this affect homeowners who obtained fixed-rate mortgages during the 1960s? How did it affect the banks that lent the money?arrow_forward
- What is the Inflation-free interest rate? Give an example?arrow_forwardThe 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 INTEREST RATE (Percent) 2006 2007 2008 5.0 3.0 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. 28 1.0 2005 -16 -40 -40 Nominal Interest Rate Inflation Rate (Percent) 1.6 2003 3.4 4.8 4.4 1.6 2004 2005 2006 2007 2008 (Percent) 27 3.4 3.2 2.9 3.8 2006 YEAR Nominal Interest Rate Real Interest Rate (?) According to…arrow_forwardWhat are the impacts of inflation for borrowers and savers?arrow_forward
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