Whats is your rational expectation of the inflation rate next year? Imagine there is an unexpected shock that hits the economy in the middle of the year, and inflation turns out to be 2%. Is your previous expectation still rational? What if you knew at the beginning of the year that crisis is likely to happen?
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- The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=940, year 2=970, year 3=1000, and year 4=1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.u are considering the choice between investing $50,000 in a conventional 1-year bank CD offering an interest rate of 5% and a 1-year Inflation-Plus CD offering 1.5% per year plus the rate of inflation. Which is the safer investment? Can you tell which offers the higher expected return? If you expect the rate of inflation to be 3% over the next year, which is the better investment? Why? If we observe a risk-free nominal interest rate of 5% per year and a risk-free real rate of 1.5% on inflation-indexed bonds, can we infer that the market's expected rate of inflation is 3.5% per year?Suppose that the nominal interst rate is 7 percent and the real interest rate is 5 percent. Instructions: round your answers to the nearest whole number. What is the inflation premium? (in percentage) Given the level of inflation, how many years would it take for the price level to double?
- Suppose 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.Suppose that a borrower and a lender agree on thenominal interest rate to be paid on a loan. Theninflation turns out to be higher than they bothexpected.a. Is the real interest rate on this loan higher or lowerthan expected?b. Does the lender gain or lose from thisunexpectedly high inflation? Does the borrowergain or lose?c. Inflation during the 1970s was much higher thanmost people had expected when the decade began.How did this unexpectedly high inflation affecthomeowners who obtained fixed-rate mortgagesduring the 1960s? How did it affect the banks thatlent the moneyA Wall Street Journal offered the following opinion of the bond market in September 2012, when inflation rate was about 2%: Ac€A?Someone buying long-term bonds yielding 1.5% or 2% and then seeing consumer price inflation of 4%, will be on the loosing end of the betAc€??. a. Explain verbally and illustrate graphically what will happen to the price of bonds if expected inflation increases to 4% from 2%. Be sure to include in your answer the demand the bond market. b. Explain why someone buying long-term bonds yielding 1.5% or 2% and then seeing consumer price inflation of 4%, will be on the loosing end of the bet. c. Suppose that you expect a greater increase in inflation than do others investors, but that you do not expect the increase to occur until 2015. Should you wait until 2015 to sell your bond? Briefly explain. d. The columnist also argued that long-term bonds would be a good investment if only Ac€A? when we get serious price deflationAc€?? Ac€?c *Explain verbally and illustrate…
- Suppose that a country’s inflation rate increasessharply. What happens to the inflation tax on theholders of money? Why is wealth held in savingsaccounts not subject to a change in the inflationtax? Can you think of any way in which holders ofsavings accounts are hurt by the increase in inflation?Suppose two parties agree that the expected inflation rate for the next year is 6 percent. Based on this, they enter into a loan agreement where the nominal interest rate to be charged is 6 percent. If inflation for the year turns out to be 4 percent, who gains and who loses? Instructions: Enter your responses as whole numbers. The ex ante real interest rate is 10 percent. This is what borrowers think they are paying and lenders think they are earning. With the actual inflation of 4 percent, the ex post real interest rate will be percent.12. Most business economists and analysts prefer to use measures of "core" inflation, which typically remove which of the following volatile components? O. Energy O. Food O. Housing O. Energy and Food
- Que 15: What is inflation targeting?make a table of values that shows the percentages decreases in buying power for inflation rate in whole numbers from 1% theough 10%A common cause of falling inflation is O Weaker growth in demand than in supply for large parts of the economy O High fees and taxes O Strong wage development O Low interest rates and rising investment