(1) Suppose you borrow $200 of principal that must be repaid at the end of two y
ID: 1228372 • Letter: #
Question
(1) Suppose you borrow $200 of principal that must be repaid at the end of two years, along with interest of 4 percent a year. If the annual inflation rate turns out to be 8 percent,
(a) What is the real rate of interest on the loan?
Instructions: Enter your response rounded to the nearest whole number. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers.
percent
(b) What is the real value of the principal repayment?
Instructions: Enter your response rounded to two decimal places.
$
(c) Who loses, the debtor or the creditor?
Debtor
Creditor
Neither
(2) According to the table below,
Asset
Change in value (%), 1991-2001
Stocks
+250%
Diamonds
+71
Oil
+66
Housing
+56
U.S. farmland
+49
Average price level
+32
Silver
+22
Bonds
+20
Stamps
-9
Gold
-29
Instructions: Enter your answer as a whole number in percent form.
What happened during the period shown to the
(a) Nominal price of gold?
by percent.
(b) Real price of gold?
by percent.
Debtor
Creditor
Neither
Explanation / Answer
a) $200 is borrowed and must be paid after 2 years with 4% PA interest rate. 8% PA is the inflation so real interest rate is actually -4% PA
b) 200-16%= 168
After two years money has lost value of $32
c) Creditor loose money
2)
-29% is nominal price of gold
-61% is real price of gold as inflation is factored in.
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