Frank agrees to lend his friend Sammy $1000 for one year so that Sammy can buy a new computer. Suppose at the beginning of the loan, the CPI was 2.25. At the end of the loan, when Franki was repaid, the CPI was 2.3. What nominal rate should Frank have charged if he wanted to receive a 0% real return? a) 3.1% b) 2.2% c) 1.6%

Frank agrees to lend his friend Sammy $1000 for one year so that Sammy can buy a new computer. Suppose at the beginning of the loan, the CPI was 2.25. At the end of the loan, when Franki was repaid, the CPI was 2.3. What nominal rate should Frank have charged if he wanted to receive a 0% real return? a) 3.1% b) 2.2% c) 1.6%

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter17: Inflation

Section: Chapter Questions

Problem 5SQ

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Suppose Dalia is a sports fan and buys only football tickets. Dalia deposits $2,000 into a savings account that pays an annual nominal interest rate of 20%. Assume this interest rate is fixed, and so it will not change over time. On the day she makes her deposit, suppose that a football ticket has a price of $20.00. Initially, Dalia's $2,000 deposit has a purchasing power of football tickets. For each of the annual inflation rates given in the following table, first determine the new price of a football ticket, assuming it rises at the rate of inflation. Then enter the corresponding purchasing power of Dalia's deposit after one year in the first row of the table for each inflation rate. Finally, enter the value for the real interest rate at each of the given inflation rates. Hint: Round your answers in the first row down to the nearest football ticket. For example, if you find that the deposit will cover 20.7 football tickets, you would round the purchasing power down to 20 football…
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