Homework #5

# Next year though there is a sudden rise in inflation

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rate of 5%. Next year though, there is a sudden rise in inflation and thus inflation equals 8%. a. How much will you pay back in one year? 15000*0.4= \$15600 b. What is the anticipated rate of inflation? 2% c. What is the unanticipated rate of inflation? 6% d. What is the real rate of interest? 3% e. What is the nominal rate of interest? 4% f. Who wins and who loses from this loan? The borrow wins, because he is the one paying the lowest rate. 2. In a given economy potential GDP is at \$60,000. If equilibrium/actual GDP is \$50,000, is there a recessionary or inflationary gap in this economy? If the MPC is .8, how much will investment spending alone have to change to close this gap? There is a recessionary gap in this economy because the potential GDP and the equilibrium GDP are not the same. The potential GDP is greater by \$10000, which is the recessionary gap. The investment spending alone will have to changeby \$ 2000 to close this gap. Simple Multiplier= 1/1-MPC = 1/1-.8 = 1/.2= 5 ∆Ig = ∆Equilibrium / Actual multiplier ∆Ig = \$10000/5 ∆Ig= \$2000
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