Tutorial assignment 4
Due at the beginning of your week 4 tutorial
1. In 2008 many households fixed their mortgage rates for the duration of the mortgage. Later in 2008 the
nominal interest rate elsewhere decreased so that those who stayed with the floating mortgage rate face
now lower interest rates on their mortgage. Suppose the inflation rate stayed fixed. Show on an
intertemporal consumption space graph how those who stayed with the floating rate benefited from not
fixing it at a higher interest.
2.
You are born with no tangible assets. You live for three periods out of which you work for two periods
and retire for one period before you die. You plan to live nothing for your heirs, and you expect your
working income to be $20 000, and $60 000 in period 1 and 2. You can borrow and lend at 1% interest
rate per period.
a.
What is the present value of your wealth at the beginning of your life?
b.
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 Three '09
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 Inflation, Interest Rates, Ralph

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