Loretta agrees to lend Ted $500,000 to buy computers for his consulting firm. They agree to a nominal interest rate of 8%. Both expect the inflation rate to be 2%
(a) Calculate the expected real interest rate.
(b) If inflation turns out to be 3% over the life of the loan, what is the real interest rate? Who gains from unexpectedly high inflation, Loretta or Ted?
(c) If inflation turns out to be 1% over the life of the loan, what is the real interest rate? Who gains from unexpectedly low inflation, Loretta or Ted?
(a) 8% - 2% = 6%.
(b) 8% - 3% = 5%. Ted gains from unexpectedly high inflation, because he repays the loan with dollars that aren't worth as much as was expected.
(c) 8% - 1% = 7%. Loretta gains from unexpectedly low inflation, because she gets repaid with dollars that are worth more than was expected.
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A) It would be .667. B) It would be 150. C) Nothing until we had current information on the price level, such as consumer price index figures. D) Only that a dollar buys more currently than it bought in 1992. E) Only that a dollar currently buys less than it bought in 1992.
Use a long-run average cost curve graph to illustrate how diseconomies of scale would not make it beneficial for two companies to go through with a merger
What will be an ideal response?
The marginal revenue product of capital is the
a. same as the marginal revenue product of labor if all resources are used b. same as the marginal physical product of capital in a perfectly competitive market c. change in the interest rate when a firm borrows $1 to buy new capital d. change in total revenue generated by an additional $1 of loanable funds e. price of adding one more machine to production
When supply is perfectly elastic, the value of the price elasticity of supply is
a. 0. b. 1. c. greater than 0 and less than 1. d. infinity.