MACROECONOMICS FOR TODAY
10th Edition
ISBN: 9781337613057
Author: Tucker
Publisher: CENGAGE L
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Question
Chapter 7, Problem 12SQ
To determine
The expected real interest rate in the economy.
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Assume the expected rate of inflation is 3 percent per year. What nominal interest rate should you charge to receive a real interest rate of 2 percent per year?
Assume you put money into an asset that pays you 7 percent interest and inflation is 5 percent. Which statement is correct?
This means the nominal rate of interest is 7 percent and the real rate is 5 percent.
This means the real rate of interest is 2 percent.
The textbook states that all interest rates would be assumed to be the real rate; thus, the nominal rate is 12 percent.
This means the nominal rate of interest is 35 percent.
If the rate of inflation falls, your real rate of interest from this asset would also fall.
You put money in an account and earn a real interest rate of 10 percent. Inflation is 4
percent, and your marginal tax rate is 40 percent. What is your after-tax real interest rate?
3.2 percent
2.4 percent
1.8 percent
4.4 percent
Chapter 7 Solutions
MACROECONOMICS FOR TODAY
Ch. 7.2 - Prob. 1GECh. 7.2 - Prob. 2GECh. 7.2 - Prob. 1YTECh. 7.2 - Prob. 2YTECh. 7 - Prob. 1SQPCh. 7 - Prob. 2SQPCh. 7 - Prob. 3SQPCh. 7 - Prob. 4SQPCh. 7 - Prob. 5SQPCh. 7 - Prob. 6SQP
Ch. 7 - Prob. 7SQPCh. 7 - Prob. 8SQPCh. 7 - Prob. 9SQPCh. 7 - Prob. 10SQPCh. 7 - Prob. 11SQPCh. 7 - Prob. 1SQCh. 7 - Prob. 2SQCh. 7 - Prob. 3SQCh. 7 - Prob. 4SQCh. 7 - Prob. 5SQCh. 7 - Prob. 6SQCh. 7 - Prob. 7SQCh. 7 - Prob. 8SQCh. 7 - Prob. 9SQCh. 7 - Prob. 10SQCh. 7 - Prob. 11SQCh. 7 - Prob. 12SQCh. 7 - Prob. 13SQCh. 7 - Prob. 14SQCh. 7 - Prob. 15SQCh. 7 - Prob. 16SQCh. 7 - Prob. 17SQCh. 7 - Prob. 18SQCh. 7 - Prob. 19SQCh. 7 - Prob. 20SQ
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- Suppose nominal interest rates increase from 8 percent to 10 percent, while inflation increases from 3 percent to 12 percent. What then happens to the real interest rate? It falls from 5 percent to -2 percent. It rises from -2 percent to 5 percent. It falls from 12 percent to 8 percent. It rises from 8 percent to 12 percent.arrow_forwardYou put money into an account that earns a 8 percent nominal interest rate. The inflation rate is 3 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest? a. 3 percent b. 3.75 percent c. 5 percent d. 6 percentarrow_forward1. Paul and Mary wanted to get married, and they wished to purchase a house for the new family. Therefore, they had arranged a meeting with a banker to know more about the mortgage details. They all expected that inflation will be 3 percent over the borrowing period, and the banker offered them a nominal interest rate of 6 percent. As it turns out, the inflation was 5 percent over the term of the loan. a. What was the expected real interest rate? b. What was the actual real interest rate? c. Who benefited and who lost because of the unexpected inflation?arrow_forward
- If Dave loans funds at 2 percent while the inflation rate is 4 percent, his real rate of interest is -2 percent?arrow_forwardThe real interest rate is 6 percent a year and the income tax rate is 50 percent. With no inflation, what is the real after-tax interest rate? If the inflation rate rises to 4 percent a year, what is the real after-tax interest rate?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_forward
- 4. Sam saved $5,000 from his income last year and decided to deposit it at a bank in a saving account. At the end of the year, his deposit account balance reached a total value of $5,200. During the year, the consumer price index rose from 250 to 265. a. Calculate Sam's nominal interest rate. Show your work. I b. Calculate Sam's real interest rate. Show your work. Explain whether Sam experienced an increase or decrease in the purchasing power of his saving over the year. c. Suppose in the following year, the CPI rises to a value of 275. Calculate the nominal interest rate that would allow Sam to maintain the purchasing power of his deposit over this second year. Show your work.arrow_forwardTrue or false? The nominal rate of interest is the difference between the real rate and the expected rate of inflation.arrow_forwardIf the nominal interest rate is 4.2 percent and expected inflation rate is 3 percent, the real interest rate equals 7.2 percent. 1.2 percent. 3.6 percent. 12.6 percent. none of the abovearrow_forward
- The real interest rate is 6 percent a year and the income tax rate is 50 percent. With no inflation, what is the real after-tax interest rate? If the inflation rate rises to 4 percent a year, what is the real after-tax interest rate? With no inflation, the real after-tax interest rate is percent a year. With inflation of 4 percent a year the real after-tax interest rate is percent a year.arrow_forwardassume instead that the nominal interest rate is 4 percent and the expected rate of inflation is minus 1 percent. Calculate the real rate of interest.arrow_forwardSuppose the inflation premium is 8.00 percent and the nominal interest rate is 4.00 percent. Instructions: In part a and b, round your answers to 2 decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. What is the real interest rate? b. What if the inflation premium is 9.00 percent while the nominal interest rate is 2.00 percent?arrow_forward
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