Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 5, Problem 2QQ
To determine
The nominal interest rate.
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Suppose that in the country of Eurasia, the velocity of
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Assume that in Azerbaijan, Alyana deposits $5,000 in the bank for a single year. Given the following cases, answer the questions.
CASE 1: inflation = 0%, nominal interest rate = 5%
CASE 2: inflation = 5%, nominal interest rate = 10%
CASE 3: inflation = 10 %, nominal interest rate = 15%
In which case does the real value of your deposit grow the most?
Assume the tax rate is 30%.
In which case do you pay the most taxes?
Compute the after-tax nominal interest rate,then subtract inflation to get the after-tax real interest rate for both cases. Answer all parts
assume 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.
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- Assume the nominal interest rate is 17 percent and the expected rate of inflation is 12 percent. Calculate real rate of interest.arrow_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_forwardSuppose you take out a multi-year loan from a bank with an intrest rate of 5%. a. The rate you are paying is the (Click to select) v interest rate. b. If the inflation rate is 2%, the real interest rate you are paying on the loan is %. c. Now suppose the following year there is unexpected inflation, and the price level increases by 7%. The real interest rate on your loan that year would be %. d. Unexpected inflation hurts (Click to select) v and helps (Click to select) e. If lenders expect higher rates of inflation, they will charge (Click to select) interest rates.arrow_forward
- In the basic New Keynesian model, if the central bank is initially achieving its goals, and the natural rate of interest rises, the central bank should A. increase the nominal interest rate by the amount of the natural real interest rate increase. B. reduce the nominal interest rate by the amount of the natural real interest rate increase. C. increase the nominal interest rate by less than the amount of the natural real rate of interest increase. D. reduce the nominal interest rate by less than the amount of the natural real interest rate increase. E. do nothingarrow_forwardSuppose there are 1200 units of money on an island, but money grows by 5.32% per year. Islanders spend each unit of money 2.3 times per year on average and this spending grows by 1.98%. The price level is at 34. GDP is expected to grow at 4.83%. What is the level of inflation? Answer this as a percentage without the percentage sign and round this to two digits after the decimal. ex. If you found the rate to be 5.125%, answer 5.13.arrow_forwardSuppose that Lauren is a savvy investor and expects inflation to equal 7 per cent in 2020, but, in fact, prices rise by only 4 per cent. How would this unexpectedly low inflation rate affect her in the following circumstances? a The federal government cuts income tax. b She has a fixed-rate mortgage home loan. c She is a casual worker with no labour contract in place. d She has invested in Treasury bonds.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_forwardIf you deposit money in the bank for one year scenario 1: nominal interest rate = 10%, inflation rate = 0%  Scenario 2: normal interest rate = 25%, inflation rate = 15% In which scenario does the real value of the deposit grow the most? Explain.arrow_forward#20.Which of the following statements is correct? a The interest rate that is usually reported is the interest rate that has been corrected for inflation. b The supply of, and demand for, loanable funds depend on the real (rather than nominal) interest rate. c If the nominal interest rate has decreased and the real interest rate has also decreased, then the inflation rate must have decreased as well. d All of the above are correct.arrow_forward
- Given a nominal interest rate of 5 percent, in which of the following cases would you earn the highest after-tax real rate of interest? Select one: a. Inflation is 1 percent; the tax rate is 50 percent. b. The after-tax real interest rate is the same for all options. c. Inflation is 2 percent; the tax rate is 40 percent. d. Inflation is 3 percent; the tax rate is 15 percent.arrow_forwardIf the nominal interest rate is 10 percent and the inflation rate is 4 percent, then the real interest rate is a. 14 percent. b. 6 percent. c. 2.5 percent. d. .4 percent.arrow_forwardSuppose 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_forward
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