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Suppose the real rate is 4.3 percent and the inflation rate is 5.9 percent. What rate would you expect to see on a Treasury bill?
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- Why do we need to calculate the average inflation rate?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 percentWhat's wrong with this way of thinking? "When the government runs a budget deficit, it simply pays its bills by printing more money. As the newly printed money works its way through the economy, it waters down the value of paper money already in circulation. Thus, it takes more money to buy things. Budget deficits are the major cause of inflation."
- You take out student loans to help pay for your degree at a 5% annual interest rate. Assume the bank expected inflation to average 3% per year. What real interest rate did they expect to earn from your loan? What happens if inflation is actually 5% per year? Who is better off if inflation is higher than expected? What if it is lower than expected? Why?Patricia knows she will have to repay a debt of $100,000. She also anticipates there will be some inflation soon. Under which of the following circumstances will Patricia pay back the least amount of money in real terms? The actual rate of inflation is less than the expected rate of inflation The actual rate of inflation equals the expected rate of inflation If the actual rate of inflation is greater than the expected rate of inflation We cannot determine this without knowing what interest rate she is paying There is no inflation at all
