MacroeconomicsSection 14_1 - CHAPTER 14 Quick Check 1 a b...

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CHAPTER 14 Quick Check 1. a. True. b. True. 4. a. No. If the nominal interest rate were negative, nobody would hold bonds. Money would be more appealing since it could be used for transactions and would earn zero—as opposed to negative—interest. b. Yes. The real interest rate is negative if expected inflation exceeds the nominal interest rate. Even in this case, the real interest rate on bonds (which pay nominal interest) exceeds the real interest rate on money (which does not pay nominal interest) by the nominal interest rate. c. A negative real interest rate makes borrowing very attractive and leads to a large demand for investment. Part II - Inflation-indexed bonds: Chapter 14, Exercise #9 The following table presents the yields on nominal and inflation indexed five-year government bonds. The data in the table below is from Fall of 2008. You can get current information by following the link indicated in the textbook. As you see, last fall investors expected inflation to be negative, which means that they were expecting a deflation. This year however they are expecting prices to increase.
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