Exam 6: Real Interest Rates

Answer the questions below. a.Suppose the Fisher hypothesis holds for an economy that has an expected real interest rate of 3 percent.For each of the expected inflation rates of 0, 3, 6, 9, and 12 percent, calculate the after-tax expected real interest rate (expressed in percentage points with two decimals), if the tax rate is 15 percent. b.Suppose the Fisher hypothesis does not hold, but instead that the after-tax expected real interest rate will be unchanged at 2.5 percent if the expected inflation rate changes.For each of the expected inflation rates of 0, 3, 6, 9, and 12 percent, calculate the (before-tax) expected real interest rate (expressed in percentage points with two decimals), if the tax rate is 15 percent.

(Essay)

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Question 41

Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $1,500 in real (inflation- adjusted) terms in one year.The real interest rate is 3 percent.What is the present value of the bond? (Round off your answer to the nearest dollar and pick the answer closest to the one you calculate.)

(Multiple Choice)

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Question 42

If your after-tax realized real interest rate was 2 percent over the past year and you owned a one-year bond that paid 8 percent interest, what was the inflation rate if you faced a tax rate of 15 percent?

(Multiple Choice)

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Question 43

If your after-tax expected real interest rate is 3 percent and your expected inflation rate is 2 percent, what was the nominal interest rate on your one-year bond if you faced a tax rate of 20 percent?

(Multiple Choice)

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Question 44

If the actual inflation was 4 percent over the past year and you owned a one-year bond that paid 4 percent interest, what was your after-tax realized real interest rate if your tax rate was 15 percent?

(Multiple Choice)

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Question 45

John bought an inflation-indexed security for $10,000 in January 2014.The security promises an annual interest rate of 5 percent and makes payments twice a year.If the value of the inflation index in January 2014 was 106 and its value in July 2014 was 105, John will receive an interest income of______ .

(Multiple Choice)

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Question 46

If the expected inflation rate was 7 percent and the actual inflation rate was 3 percent, then

(Multiple Choice)

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Question 47

How can the expected inflation rate be measured?

(Essay)

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Question 48

Which of the following happens when the expected inflation rate rises?

(Multiple Choice)

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Question 49

The president of the United States is considering two different candidates to chair the Federal Reserve.If he chooses Alan, the probability that inflation will be 2 percent is 0.4 and the probability that inflation will be 4 percent is 0.6.If the president chooses Ben, the probability that inflation will be 2 percent is 0.6 and the probability that inflation will be 3 percent is 0.4.If you are an investor with your funds invested in bonds paying 7 percent, calculate the standard deviation of your real return if Alan is chosen to chair the Fed and if Ben is chosen to chair the Fed.Which candidate would you prefer? Explain why.

(Essay)

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Question 50

Suppose that a change in the expected inflation rate leads supply and demand to adjust so that the expected real interest rate is unchanged at 3.0 percent.The tax rate is 30 percent.Initially, the expected inflation rate is 3.0 percent.If the expected inflation rate rises from 3 percent to 6 percent, the after-tax expected real interest rate

(Multiple Choice)

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Question 51

If your after-tax expected real interest rate is 3 percent on a one-year bond that pays 4 percent interest, what is the expected inflation rate if you face a tax rate of 20 percent?

(Multiple Choice)

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Question 52

Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $1,500 in real (inflation- adjusted) terms each year for the next five years, plus your real principal of $75,000 at the end of the fifth year.The nominal interest rate is 5 percent and the expected inflation rate is 3 percent.What is the present value of the bond? (Round off your answer to the nearest thousand dollars and pick the answer closest to the one you calculate.)

(Multiple Choice)

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Question 53

According to the Fisher hypothesis, if the real interest rate is 2 percent and the inflation rate falls from 3 percent to 1 percent, then the nominal interest rate will_percentage points and the real interest rate will decline by__ percentage points.

(Multiple Choice)

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Question 54

The price of a certain amount of goods and services a year back was $200.If price increased by 4 percent during the year, how much money is required to buy the same amount of goods today?

(Multiple Choice)

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Question 55

$\text { Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you } \$ 1,500 \text { in real (inflation- }$ adjusted) terms each year for the next five years, plus your real principal of $75,000 at the end of the fifth year.The nominal interest rate is 5 percent and the expected inflation rate is 2 percent.What is the present value of the bond? (Round off your answer to the nearest thousand dollars and pick the answer closest to the one you calculate.)

(Multiple Choice)

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Question 56

In recessions, the long-term expected real interest rate usually

(Multiple Choice)

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Question 57

If the expected inflation rate is 3 percent, the nominal interest rate is 5 percent, and the actual inflation rate turns out to be 4 percent, then the realized real interest rate is_than the expected real interest rate and borrowers_ relative to lenders.

(Multiple Choice)

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Question 58

The hypothesis that an increase in the expected inflation rate will cause the nominal interest rate to rise and the real interest rate to remain unchanged is the

(Multiple Choice)

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Question 59

Showing 41 - 59 of 59

If your after-tax realized real interest rate was 2 percent over the past year and you owned a one-year bond that paid 8 percent interest, what was the inflation rate if you faced a tax rate of 15 percent?

If your after-tax expected real interest rate is 3 percent and your expected inflation rate is 2 percent, what was the nominal interest rate on your one-year bond if you faced a tax rate of 20 percent?

If the actual inflation was 4 percent over the past year and you owned a one-year bond that paid 4 percent interest, what was your after-tax realized real interest rate if your tax rate was 15 percent?

If the expected inflation rate was 7 percent and the actual inflation rate was 3 percent, then

How can the expected inflation rate be measured?

Which of the following happens when the expected inflation rate rises?

If your after-tax expected real interest rate is 3 percent on a one-year bond that pays 4 percent interest, what is the expected inflation rate if you face a tax rate of 20 percent?

According to the Fisher hypothesis, if the real interest rate is 2 percent and the inflation rate falls from 3 percent to 1 percent, then the nominal interest rate will_percentage points and the real interest rate will decline by__ percentage points.

The price of a certain amount of goods and services a year back was $200.If price increased by 4 percent during the year, how much money is required to buy the same amount of goods today?

In recessions, the long-term expected real interest rate usually

If the expected inflation rate is 3 percent, the nominal interest rate is 5 percent, and the actual inflation rate turns out to be 4 percent, then the realized real interest rate is_than the expected real interest rate and borrowers_ relative to lenders.

The hypothesis that an increase in the expected inflation rate will cause the nominal interest rate to rise and the real interest rate to remain unchanged is the

Money and the Financial System

The Financial System and the Economy

Money and Payments

Present Value

The Structure of Interest Rates

Stocks and Other Assets

How Banks Work

Governments Role in Banking

Economics Growth and Business Cycles

Modeling Money

The Aggregate-Demandaggregate-Supply Model

Modern Macroeconomic Models

Economic Interdependence

The Federal Reserve System

Monetary Control

Monetary Policy: Goals and Tradeoffs

Rules for Monetary Policy

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Exam 6: Real Interest Rates

If your after-tax realized real interest rate was 2 percent over the past year and you owned a one-year bond that paid 8 percent interest, what was the inflation rate if you faced a tax rate of 15 percent?

If your after-tax expected real interest rate is 3 percent and your expected inflation rate is 2 percent, what was the nominal interest rate on your one-year bond if you faced a tax rate of 20 percent?

If the actual inflation was 4 percent over the past year and you owned a one-year bond that paid 4 percent interest, what was your after-tax realized real interest rate if your tax rate was 15 percent?

If the expected inflation rate was 7 percent and the actual inflation rate was 3 percent, then

How can the expected inflation rate be measured?

Which of the following happens when the expected inflation rate rises?​

If your after-tax expected real interest rate is 3 percent on a one-year bond that pays 4 percent interest, what is the expected inflation rate if you face a tax rate of 20 percent?

According to the Fisher hypothesis, if the real interest rate is 2 percent and the inflation rate falls from 3 percent to 1 percent, then the nominal interest rate will_____percentage points and the real interest rate will decline by______ percentage points.

The price of a certain amount of goods and services a year back was $200.If price increased by 4 percent during the year, how much money is required to buy the same amount of goods today?

In recessions, the long-term expected real interest rate usually

If the expected inflation rate is 3 percent, the nominal interest rate is 5 percent, and the actual inflation rate turns out to be 4 percent, then the realized real interest rate is_____than the expected real interest rate and borrowers_____ relative to lenders.

The hypothesis that an increase in the expected inflation rate will cause the nominal interest rate to rise and the real interest rate to remain unchanged is the

Money and the Financial System

The Financial System and the Economy

Money and Payments

Present Value

The Structure of Interest Rates

Stocks and Other Assets

How Banks Work

Governments Role in Banking

Economics Growth and Business Cycles

Modeling Money

The Aggregate-Demandaggregate-Supply Model

Modern Macroeconomic Models

Economic Interdependence

The Federal Reserve System

Monetary Control

Monetary Policy: Goals and Tradeoffs

Rules for Monetary Policy

Filters

Which of the following happens when the expected inflation rate rises?

According to the Fisher hypothesis, if the real interest rate is 2 percent and the inflation rate falls from 3 percent to 1 percent, then the nominal interest rate will_percentage points and the real interest rate will decline by__ percentage points.

If the expected inflation rate is 3 percent, the nominal interest rate is 5 percent, and the actual inflation rate turns out to be 4 percent, then the realized real interest rate is_than the expected real interest rate and borrowers_ relative to lenders.