/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q8. If the inflation premium is 2 pe... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 9: Q8. (page 195)

If the inflation premium is 2 percent and the nominal interest rate is 1 percent, what is the real interest rate? What is the real interest rate if the inflation premium is 3 percent while the nominal interest rate is 0.5 percent?

Short Answer

Expert verified

The real interest rate is -1%.

The real interest rate is -2.5%.

Step by step solution

01

Explanation for part (a)

The real interest rate is the rate that decides the real value of the interest payment that the borrowers have to pay to the lenders for the loan amount. The relationship between real and nominal interest rates is given below:

Nominal Interest Rate = Real Interest Rate + Inflation Premium

Thus, If the inflation premium is 2%, and the nominal interest rate is 1%, the real interest rate will be -1%, as shown below:

1=RealInterestRate+2RealInterestRate=1-2=-1%

02

Explanation for part (b)

Nominal Interest Rate = Real Interest Rate + Inflation Premium

Thus, if the inflation premium is 3%, and the nominal interest rate is 0.5%, the real interest rate will be -2.5%, as shown below:

0.5=RealInterestRate+3RealInterestRate=0.5-3=-2.5%

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Suppose that a country has 9 million people working full-time. It also has 1 million people who are actively seeking work but are currently unemployed, along with 2 million discouraged workers who have given up looking for work and are currently unemployed. What is this country鈥檚 unemployment rate?

  1. 10 per cent

  2. 15 per cent

  3. 20 per cent

  4. 25 per cent

Most economists agree that the immediate cause of most cyclical changes in real output and employment is an unexpected change in ___________________.

  1. the level of total spending

  2. the value of the stock market

  3. the value of the trade deficit

  4. the unemployment rate

Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent, and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would be willing to accept from her local bank?

  1. 4 percent

  2. 5 percent

  3. 6 percent

  4. 7 percent

Can frictional unemployment by itself explain the fact that the late 2010s saw more job openings than unemployed workers? Why are there plenty of skilled workers among older job seekers but very few in their twenties, thirties, and forties? What happens to the speed at which positions are filled if employers ask for unnecessary qualifications?

What is the Consumer Price Index (CPI), and how is it determined each month? How does the Bureau of Labor Statistics calculate the inflation rate from one year to the next? How does inflation affect the purchasing power of a dollar? How does it explain differences between nominal and real interest rates? How does deflation differ from inflation?
See all solutions

Recommended explanations on Economics Textbooks

Taxation Economics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.