PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 6, Problem 8RQ
To determine
Explain whether the statement is true or false.
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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…
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.)
Suppose 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?
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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