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2 May 2019

During the last year you lent money at a nominal rate of 6 percent.Actual inflation was 1 percent, but people had been expecting 1.5percent . This difference between actual and expectedinflation

A. transferred wealth from the borrower to you and caused youractual real interest rate to be more than 0.5 percentage pointshigher than what you had expected.
B. transferred wealth from you to the borrower and caused youractual real interest rate to be more than 0.5 percentage pointslower than what you had expected.
C. transferred wealth from the borrower to you and caused youractual real interest rate to be 0.5 percentage points higher thanwhat you had expected.
D. transferred wealth from you to the borrower and caused youractual real interest rate to be 0.5 percentage points lower thanwhat you had expected.

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Hubert Koch
Hubert KochLv2
3 May 2019

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Related questions

Suppose that a borrower and lender agree on an interest rate for aloan, but the inflation turns out to be higher than they both hadexpected.
A) Will this cause the real interest rate on the loan to be higheror lower than expected? You should be able to relate this to theFisher Equation.
B) Does the borrower gain or lose from the unexpectedly highinflation? Explain. What about the lender?
23. Shoe-leather costs refer to the costs of:
 
  the raw material used in production.
  the increased number of transactions as inflation increases.
  living adjustments as inflation increases.
  the raw material used in production, the increased number of transactions as inflation increases, and living adjustments as inflation increases.
24. Unit-of-account costs of inflation are the:
 
  costs associated with money being a less reliable unit of measurement.
  costs of transactions associated with avoiding the inflation tax.
  costs associated with businesses changing prices.
  transfers the government gets from printing money.
25. Menu costs of inflation are the:
 
  costs associated with money being a less reliable unit of measurement.
  costs of transactions associated with avoiding the inflation tax.
  costs associated with businesses changing prices.
  revenue the government gets from printing money.
26. Which statement is true?
 
  Unexpected inflation benefits lenders and hurts borrowers.
  Unexpected inflation benefits borrowers and hurts lenders.
  Unexpected inflation benefits borrowers but does not affect lenders.
  Unexpected deflation benefits lenders but does not affect borrowers.
27. Suppose that the nominal rate of interest is 7 percent and the inflation rate is 3 percent. The real rate of interest is equal to:
 
  3 percent.
  4 percent.
  10 percent.
  7 percent.
28. You have gone to the bank to borrow money for one year. The nominal annual interest rate is 7.5 percent. The real rate of interest is 4 percent. (Hint: what is the expected inflation rate?) Over the course of the year, overall prices increased by 3 percent. (Hint: What is the actual inflation rate?) This rate of inflation hurt the _____ because the actual rate of inflation was _____ than the anticipated rate of inflation.
 
  lender, higher
  lender, lower
  borrower, higher
  borrower, lower

Suppose expected inflation was 2% and actual inflation was 4%. Then the ex post real interest rate was ---- than the ex ante real interest rate and there was a redistribution of wealth from ----.

a higher; borrowers to lenders

b higher; lenders to borrowers

c lower; borrowers to lenders

d lower; lenders to borrowers

Suppose that, in the short run, the price level is sticky (fixed) but nominal interest rates adjust to achieve equilibrium in the money market. According to the liquidity preference theory, if the central bank increases the money supply, then short-term nominal interest rates

a rise.

b fall.

c remain unchanged.

All else equal, if the ratio of reserves to deposits increases, the money supply

a increases

b decreases

c remains the same

Depreciation is tax-deductible but based on the historical cost of capital. If inflation is positive, then the corporate income tax ---- investment.

a encourages

b discourages

c has no effect on

If the price index for capital goods is the same as the price index for other goods, an index of the real cost of capital, in the absence of taxes, is the

a nominal interest rate plus the depreciation rate.

b real interest rate plus the depreciation rate.

c purchase price of a capital good multiplied by the sum of the nominal interest rate plus the depreciation rate.

d purchase price of a capital good multiplied by the sum of the real interest rate plus the depreciation rate.

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