Answer : Interest rates can move in a variety of ways to an unanticipated increase in inflation. If there is an incrase to invest in business assets then the loanable funds available can increase and shift upwards. This will cause the interest rate to rise. When higher interest rates come around it could cause savings to increase. This would lead to loanable funds increasing. Borrowers could also cun back on loanable funds when this occurs.
Problem 8-1 Answer: Enter the answers in blue shaded cells Formula Calculation Nominal interest rate 1.02*1.005=1.0251 2.51% Correct! Assume investors expect a 2.0 percent real rate of return over the next year. If inflation is expected to be 0.5 percent, what is the expected nominal interest rate for a one-year U.S. Treasury security?
Problem 8-2 Answer: Enter the answers in blue shaded cells Step 1: Nominal interest rate 2.25% Correct! Step 2: Formula Calculation Annual inflation rate 2.25+1.5 3.75% This one should be .75% A one-year U.S. Treasury security has a nominal interest rate of 2.25 percent. If the expected real rate of interest is 1.50 percent, what is the expected annual inflation rate?
Problem 8-7 Enter the answers in blue shaded cells Formula Calculation a. Government debt rate 2.5%+3% 5.5% b. Corporate debt rate 5.5%+2% 7.5% Correct!
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