b. If inflation forces up the price of consumer goods, but some entrepreneurs mi

Question

b. If inflation forces up the price of consumer goods, but some entrepreneurs mistake these higher prices for higher demand, what kind of mistakes might they make? (Hint: how would entrepreneurs normally respond to higher prices for what they sell?)

c. If current home loan rates are 4%, and inflation is estimated to stay around 2% over the life of the loans, what is the anticipated real rate of return on these loans? If actual inflation rises to 5%, what happens to the rate of return? What might happen to banks, investment companies, and government agencies that are holding large amounts of home loans as their main investments?

Explanation / Answer

If the prices of goods go up ....obviously entrepreneurs would wannt to make more profit and so they would try to increase supply by increasing the production.....

This in turn has negative effect as supply increases greater than demand ....prices of goods drop as ...one would like to sell all the goods produced may be if he has to reduce the price for that

c) 1+r = (1.04/1.02 ) = 1.0196

r = 0.0196 = 1.96 %

1+rate of return = 1.0196*1.05 = 1.0706

r (new) = 0.0706 = 7.06 %

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