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Suppose I borrow $200,000 for one year at a fixed nominal interest rate of 7 percent.
(a) What is my nominal repayment next year?
(b) Suppose that at the time the loan was made, both the lender and I believed that the (ex-ante) rel interest rate on the loan would be two percent. Suppose the actual inflation rate over the life of the loan turns out to be 4 percent. What is the ex-post real interest rate? Does the inflation rate help me at the expense of the lender, or help the lender at my expense?
(c) Re-do question (b) assuming that the inflation rate turns out to be 5 percent and 6 percent.
(d) Given that the lender and I agreed that the ex-ante real interest rate should be 2 percent, what nominal interest rate would I have been charged if the lender and I had expected inflation over the life of the loan to be 10 percent? 3 percent? 0 percent?
(e) Inflation increased enexpectedly during the 1970s. Explain why this helped someone who bought a house using a 30-year mortgage with fixed nominal interest rates in 1965, but not someone who bought a house using a 30-year mortgage with a fixed nominal interest rate in 1980.
Discuss the concept of the financial rate of return on a college education. If this return is less than the return on a bank account, does that mean you should quit college? Why might you want to stay in school anyway? Are there circumstances under w..
A consumer has utility function given by u(x_1, x_2) = Squarerootx_1x_2. Suppose the price of good 1 falls from $5 to $2. while the price of good 2 and the consumer's income remain constant at $10 and $100, respectively. Find the substitution, income..
A competitive firm has the production function q =f(L,K) =rad(L)+2rad(K) , for which MPl =1/2rad(L) and MPk = 1/rad(K). Find the firm's conditional factor demands for L and K at the factor prices w = 4 and r = 2. What is the firm's (total) cost curve..
If the price in a market happens to be above equilibrium, there will be a ___ in the market, and the price will tend to ____
A hospital bought digital imaging equipment annual payments of $243,000 per year over 8 years. if the interest rate is 13% what will the total amount paid for the equipment be at the end of the eighth year?
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In order to maximize utility subject to a budget constraint, consumers will:
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Suppose the marginal costs of pollution reduction are unknown and the government is choosing between regulating the quantity of pollution directly or taxing pollution. “If the marginal benefit from pollution reduction is elastic (flat), it is better ..
hat drug is nearly through clinical trials, and is expected to produce an acceptable return on the investments that have been and will still need to be made in it.
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