SOLVED

13.6  Real versus Nominal Interest Rates 1) The nominal interest rate equals the real interest rate ________ the inflation rate. A) times B) divided by C) plus D) minus 2) The real interest rate equals the nominal interest rate ________ the inflation rate. A) times B) divided by C) plus D) minus 3) The stated interest rate on a loan is the A) real interest rate. B) nominal interest rate. C) actual inflation rate. D) expected inflation rate. 4) If the nominal rate of interest is 6.5% and the inflation rate is 3.0%, what is the real rate of interest? A) -9.5% B) -3.5% C) 1.5% D) 3.5% E) 9.5% 5) Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest. If the inflation rate was 4%, what was the real interest rate you paid? A) 16 percent B) 12 percent C) 8 percent D) 6 percent 6) Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest. If the inflation rate was 7%, what was the real interest rate you paid? A) 17 percent B) 10 percent C) 7 percent D) 3 percent 7) Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5 percent, then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation A) equal to 0 percent. B) greater than 7 percent. C) equal to 7 percent. D) less than 7 percent. 8) Suppose you lend $1,000 at an interest rate of 10 percent over the next year. If the expected real interest rate at the beginning of the loan contract is 4 percent, then what rate of inflation over the upcoming year would be most beneficial to you as the lender? An inflation rate A) equal to 0 percent. B) greater than 6 percent. C) equal to 6 percent. D) equal to 4 percent. 9) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. Inflation during that year is 5%. As a result, you will receive ________ at the end of the year, but that money has a purchasing power of ________. A) $5,050; $5,025 B) $5,100; $5,050 C) $5,500; $5,250 D) $6,000; $5,500 10) When deflation occurs, A) the real interest rate is greater than the nominal interest rate. B) the nominal interest rate is greater than the real interest rate. C) the nominal interest rate is equal to the real interest rate and inflation is negative. D) the nominal interest rate is equal to the real interest rate and inflation is positive.