# ECON 230 Regent University Week Inflation Assignment 4

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xelb2019

Economics

Regent University

## Description

Week 4- ASSIGNMENTS (3 & 4)

Assignment 3

Section A

1.Calculate inflation in the following cases (50 POINTS):

 Price Level Last Year (\$) Price Level This Year (\$) Inflation Rate 100 110 250 300 4,000 4,040

8000 8050

12045 13159

Section B (This adds up to 50 points)

2. Ifthenominalinterestrate is5percentandtherealinterestrate is2percent, thentheinflationpremiumis __________________

3.Ifboththerealinterestrate andthenominalinterestrate are3percent,thenthe

B. realGDPmust exceedthenominalGDP.

C. nominalGDP must exceedtherealGDP.

4. Supposethenominalannualinterestrateonatwo-yearloanis8percentand lenders expectinflationto be 5percentineachofthetwoyears.Theannual real rateofinterestis

Assignment 4

Section A (Each question is 10 points)-EXPLAIN your ANSWERS FOR THE FOLLOWING QUESTIONS USING ECONOMIC THEORIES AND CONCEPTS.

• Who gets helped by a surprise inflation: people who owe money or people who lend money?
• Who is more likely to lobby the government for fast money growth: people who have mortgages or people who own banks that lent money for those mortgages?
• Consider the interaction between inflation and the tax system (assume the inflation is expected). Does high inflation encourage people to save more or discourage saving? If a government wants to raise more tax revenue in the short run, should it push for higher or lower inflation?
• Which tells me more about how many more goods and services I can buy next year if I save my money today: the nominal interest rate or the real interest rate? Which interest rate gets talked about more in the media?
• Why is it so painful to get rid of inflation? Why can’t the government just stop printing so much money?

Section B (10 POINTS EACH)

In the following cases, will real growth rise, fall, or remain unchanged according to the New Keynesian model (50 POINTS)? Students have to explain the answers they select for full credit.

a) Expected inflation 5%,

Actual inflation 8%

b) Expected inflation 8%

Actual inflation 1%

c)Expected inflation 6%,

Actual inflation 6%

d)Expected inflation 7%,

Actual inflation -4%

e) Expected inflation -1%,

Actual inflation 0%

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Week 4- ASSIGNMENTS (3 & 4)
Assignment 3
Section A
1. Calculate inflation in the following cases (50 POINTS):
Price Level Last Year (\$)
100
250
4,000

Price Level This Year (\$)
110
300
4,040

8000

8050

12045

13159

Inflation Rate

Section B (This adds up to 50 points)
2.

If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation

3.If both the real interest rate and the nominal interest rate are 3 percent, then the
B. real GDP must exceed the nominal GDP.
C. nominal GDP must exceed the real GDP.
D. inflation premium also is 3 percent.

4. Suppose the nominal annual interest rate on a two-year loan is 8 percent and lenders expect
inflation to be 5 percent in each of the two years. The annual real rate of interest is
5.. Suppose that lenders want to receive a real rate of interest of 5 percent and that they expect
inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a
nominal interest rate of ___________________________

Assignment 4

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