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Chapter 7: Q12 - Problems (page 142)

The real interest rate is 4 percent, and the nominal interest is 6 percent. What is the anticipated rate of inflation.

Short Answer

Expert verified

Inflation $r a t e = 2 %$

Step by step solution

01

Basic Concept

Nominal Interest rate is the interest rate prevailing in the economy.

Real Interest rate is the interest rate adjusted for inflation level, shows the actual increase in the value of money.

02

Numerical Explanation

Real Interest Rate = Nominal Interest Rate - Inflation Rate

Putting the values of $R e a l I n t e r e s t R a t e = 4 %, N o m i n a l I n t e r e s t R a t e = 6 %$

$4 % = 6 % - I n f l a t i o n R a t e I n f l a t i o n R a t e = 6 % - 4 % I n f l a t i o n R a t e = 2 %$

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Most popular questions from this chapter

Consider the diagram below. The line represents the economy's growth trend, and the curve represents the economy's actual course of business fluctuations. For each part below, provide the letter label from the portion of the curve that corresponds to the associated term.

a. Contraction

b. Peak

c. Trough

d. Expansion

During the course of a year, the labour force consists of the same 1,000 people. Employers have chosen not to hire 20 of these people in the face of government regulations making it too costly to employ them. Hence, they remain unemployed throughout the year. At the same time, every month during the year, 30 different people become unemployed, and 30 other different people who were unemployed find jobs.

a. What is the frictional unemployment rate?

b. What is the unemployment rate?

c. Suppose that a system of unemployment compensation is established. Each month, 30 new people (not including the 20 that employers have chosen not to employ) continue to become unemployed, but each monthly group of newly unemployed now takes two months to find a job. After this change, what is the frictional unemployment rate?

d. After the change discussed in part (c), what is the unemployment rate?

Between 2017 and 2018 in a particular nation, the value of the consumer price index for which the base year is 2014 -rose by 9.091 per cent, to a value of 120 in 2018. What was the value of the price index in 2017?

Suppose that in Figure 7-2, the number of people employed was to expand by 9.2 million, and the number of people unemployed was to rise by 7.1 million. What would be the new values of the labour force and of the unemployment rate?

At present, the nominal interest rate is 7 per cent, and the expected inflation rate is 5 per cent. The current year is the base year for the price index used to calculate inflation.

a. What is the real interest rate?

b. What is the anticipated value of the price index next year?

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