Suppose you negotiate a one-year loan with a principal of $1000 and the nominal interest rate is currently 7%. You expect the inflation rate to be 3% over the next year. When you repay the principal plus interest at the end of the year, the actual inflation rate is 2.5%. Compute the ex ante and ex post real interest rate. Who benefits from this unexpected decrease in inflation? Who loses?
What will be an ideal response?
The ex ante real interest rate is 4% (= 7% - 3%). The ex post real interest rate is 4.5% (= 7% - 2.5%). The unexpected decrease in inflation benefits the lender because he/she receives a higher real interest rate than what was expected. The borrower loses because his/her real interest rate is higher than expected.
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The sale of a used automobile would not be included in the GDP for the current year because it is a:
A. nonmarket transaction. B. public transfer payment. C. noninvestment transaction. D. nonproduction transaction.
A black market is a market where buying and selling take place
A) at prices that violate government price regulations. B) in non-licensed shops and warehouses. C) after regular office hours. D) on foreign soil.
A normative statement is one which:
What will be an ideal response?
Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is considering setting up his business as a sole proprietorship. What is one advantage to Jeremy of setting up his business as a sole proprietorship?
A) As a sole proprietor, Jeremy would have the ability to share risk with shareholders. B) As a sole proprietor, Jeremy would have both ownership and control over the business. C) As a sole proprietor, Jeremy would face limited liability. D) All of the above would be advantages of setting up his business as a sole proprietorship.