ECO202: Tutorial Worksheet 15
1.
For each of the following problems, would you use real payments and real interest rates
or nominal payments and nominal interest rates to compute the expected present
discounted value? In each case, explain why.
a.
Estimating the present discounted value of the profits from purchasing a new
machine.
b.
Estimating the present value of a 20year government bond.
c.
Deciding whether to lease a car.
2.
For each of the following, compute the real interest rate using the exact formula and the
approximate formula.
a.
i = 4%,
π
e
= 2%
b.
i = 15%,
π
e
= 11%
c.
i = 54%,
π
e
= 46%
3.
Real and nominal interest rates
a.
Can the nominal interest rate ever be negative? Explain.
b.
Can the real interest rate ever be negative?
Under what circumstances? If so, why
not just hold cash instead?
c.
What are the effects of a negative real interest rate on borrowing and lending?
4.
You want to save $2000 today for retirement in 40 years. You have to choose between
two plans:
i.
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 Spring '11
 Wolfson
 Inflation, Interest Rates, Nominal Interest Rate, present discounted value

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