Suppose we expect an inflation rate of 2% for the next year. If a lender require

Question

Suppose we expect an inflation rate of 2% for the next year. If a lender requires a 3% real return on a one year loan, what interest rate should he charge? Refer to above. Suppose we get an unexpected 1% of additional inflation over the year. Who is made worse off by this? Who is made better off? What does this imply about inflation's ability to arbitrarily redistribute wealth? Refer to above. Given your answer in 10, how do you believe credit and financial markets will respond in the presence of uncertainty about inflation? If the Fed wants to keep these markets stable, how should it behave?

Explanation / Answer

8.

If there is an unexpected inflation, lenders lose and borrowers gain. Borrowers are betteroff as they pay less interest when inflation is considered. Interest rates has to be raised to bring this to normal

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.