PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 6, Problem 4RQ
To determine
Describe the role of indexation in inflation.
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Inflation is expected to be 3% in the coming year. If Mr. Gonza earned $45,000 this year, how much must he earn in the following year to keep up with inflation and maintain a balance between his income and his increasing expenditures? (Show all work.)
a)Suppose that on January 1, 2019 a bank lends $20,000 to a person. The bank and the individual both agree that the real interest rate charged on the loan should be 10% and the loan is going to be totally paid ($20,000 plus interest), in a one-time payment, on December 31, 2020. Suppose the two parties to this transaction can perfectly foresee what the inflation rate for this period is going to be.
b) Assume the same conditions exist as in the paragraph a but now the bank and the borrower cannot predict the inflation rate perfectly. Assume that both the bank and the borrower expect an inflation rate of 8% over this period of time. Given this information, what is the nominal rate charged on the loan now? Given the actual inflation rate (from your calculations and the provided data), who wins from this loan contract and who loses from this loan contract? Explain your answer fully. What if the expected inflation rate is 4% during this period? Does your answer change as to who wins and…
Q7. Suppose that your annual income (nominal) in year 1 is $45,000, and in year 2 is
$51,232. If the CPI in year 1 is 143.6, and in year 2 is 150.7,
a) Has your real income increased, decreased, or remain unchanged? Explain your answer.
b) What is the inflation rate between the two years?
Chapter 6 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
Ch. 6 - Prob. 1RQCh. 6 - Prob. 2RQCh. 6 - Prob. 3RQCh. 6 - Prob. 4RQCh. 6 - Prob. 5RQCh. 6 - Prob. 6RQCh. 6 - Prob. 7RQCh. 6 - Prob. 8RQCh. 6 - Prob. 1PCh. 6 - Prob. 2P
Ch. 6 - Prob. 3PCh. 6 - Prob. 4PCh. 6 - Prob. 5PCh. 6 - Prob. 6PCh. 6 - Prob. 7PCh. 6 - Prob. 8PCh. 6 - Prob. 9PCh. 6 - Prob. 10PCh. 6 - Prob. 6.1CCCh. 6 - Prob. 6.2CCCh. 6 - Prob. 6.3CCCh. 6 - Prob. 6.4CCCh. 6 - Prob. 6.5CCCh. 6 - Prob. 6.6CCCh. 6 - Prob. 6.7CCCh. 6 - Prob. 6.8CCCh. 6 - Prob. 6.9CC
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