Macroeconomics
13th Edition
ISBN: 9781337617390
Author: Roger A. Arnold
Publisher: Cengage Learning
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Question
Chapter 14, Problem 15QP
To determine
The nominal interest rate and the real interest rate.
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How might a rapid rise in inflation harm you? How might a rapid rise in inflation help you? In answering this question consider your role as both a consumer, worker, and borrower. Consider the likely effect on your real wages, and any interest you receive as a saver. Would it be advantageous to borrow money if you expected inflation to rise? Does it make economic sense to open a savings account at a bank given the latest increase in the CPI.
Do the interest rates reflect the market interest rate?
If you are a banker, should you consider the nominal or real interest rate when deciding which rate to charge for a loan? Explain in 250 words.
Chapter 14 Solutions
Macroeconomics
Ch. 14.1 - Prob. 1STCh. 14.1 - Prob. 2STCh. 14.1 - Prob. 3STCh. 14.2 - Prob. 1STCh. 14.2 - Prob. 2STCh. 14.3 - Prob. 1STCh. 14.3 - Prob. 2STCh. 14.3 - Prob. 3STCh. 14.4 - Prob. 1STCh. 14.4 - Prob. 2ST
Ch. 14.4 - Prob. 3STCh. 14 - Prob. 1QPCh. 14 - Prob. 2QPCh. 14 - Prob. 3QPCh. 14 - Prob. 4QPCh. 14 - Prob. 5QPCh. 14 - Prob. 6QPCh. 14 - Prob. 7QPCh. 14 - Prob. 8QPCh. 14 - Prob. 9QPCh. 14 - Prob. 10QPCh. 14 - Prob. 11QPCh. 14 - Prob. 12QPCh. 14 - Prob. 13QPCh. 14 - Prob. 14QPCh. 14 - Prob. 15QPCh. 14 - Prob. 16QPCh. 14 - Prob. 17QPCh. 14 - Prob. 18QPCh. 14 - Prob. 19QPCh. 14 - Prob. 1WNGCh. 14 - Prob. 2WNGCh. 14 - Prob. 3WNGCh. 14 - Prob. 4WNGCh. 14 - Prob. 5WNGCh. 14 - Prob. 6WNGCh. 14 - Prob. 7WNGCh. 14 - Prob. 8WNG
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- How does an increase in interest rates affect business? Consumers?arrow_forwardDennis buys a house in 1973 and finances it with a mortgage that carries an annual interest rate of 7 per cent. Inflation in 1973 is 3 per cent, inflation in 1974 is 4 per cent, and inflation in 1975 is 5 per cent. What is the real interest rate Dennis pays on his mortgage in 1974? Write your answer as a percentage.arrow_forwardTrue or false? The nominal rate of interest is the difference between the real rate and the expected rate of inflation.arrow_forward
- Why is it important that the rate at which we earn interest should be higher than the inflation ratearrow_forwardWhat is the difference between real and nominal interest rates? why is the distinction important? What factors change interestrates?arrow_forwardWhat is the relationship between nominal and effective interest rates?arrow_forward
- Suppose the nominal interest rate on savings deposits is 3% and inflation is running at 5%. What happens to your money and the real interest rate?arrow_forwardWhat is the real interest rate?arrow_forwardSuppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.Is the real interest rate on this loan higher or lower than expected?Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?Inflation during the 1970s was much higher than most people had expected when the decade began. How did this affect homeowners who obtained fixed-rate mortgages during the 1960s? How did it affect the banks that lent the money?arrow_forward
- Suppose you take out a loan for school this year for $4500. The bank expects that the rate of inflation for next year will equal 2%. You and the bank agree that in one year's time, you will pay back the full amount at an interest rate of 6%. Next year though, there is a sudden rise in inflation, causing inflation to equals 7%. How much will you pay back in one year?arrow_forwardwhat is high interest rates?arrow_forwardExplain the difference between real and nominal interest rates. Can interest rates ever be negative? Explain.arrow_forward
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