5, suppose that the nominal interest rate is 2% and the inflation rate is 4%. (I

Question

5, suppose that the nominal interest rate is 2% and the inflation rate is 4%. (I) n) What is the real interest rate? Explain why borrowers are benefitted in this situation. 6. You are given the following information about the country. Party Land. Nominal GDP $1 million $1.5 million CPI 100 105 Population Real GDP Per Capita 1,000 1,500 Year Real GDP 2003 2004 (a) Calculate the missing column for real GDP for 2003 and 2004. (b) Calculate the missing column for the standard of living or real GDP per capita for 2003 (c) what is the base year for the economy? How did you identify this? (d) using the base year you identified in part C, what is the inflation rate for 2003-2004? -2004. standard of living for the citizens of Party Land change from 2003 to 2004? (e) How did the (?) Why do we calculate the standard of living with real GDP per capital rather than using nominal GDP per capita?

Explanation / Answer

5- A-real interest rate is the rate that is adjusted for inflation,

here it is 2%-4% = -2%

B-borrowers are benefitted in this situation because their real payment has decreased, the inflation is so high that the real value of the payment that has to be done has decreased making it better and easier for the borrower to pay.

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