Interest rates and inflation, Macroeconomics

Assignment Help:

Q. Interest rates and inflation?

Assume you have 1 million on 1st January 2008. A basket of services and goods similar to the CPI basket costs 100,000. You can then purchase exactly 10 such baskets on 1st January 2008.

Say that you can invest your million at a 10% interest rate. On 1st January 2009 you will then have 1.1 million. 1.1 million may not be enough for 11 baskets as prices may have changed. Let's say that inflation was 4% in 2008. Price of a basket has then increased to 100,000 * 1.04 = 104,000 and you can buy 1,100 / 104 = 10.58 baskets which is 5.8% more than last year. Yet your wealth has increased by 10% (in whatever currency you use), your real wealth (in baskets) has only increased by 5.8% and we say that real interest rate is 5.8%.


Related Discussions:- Interest rates and inflation

Monetary sector, If the reserve bank wants to pursue a contractionary polic...

If the reserve bank wants to pursue a contractionary policy, what should it do?

What are the advantages of capitalism, The benefits of capitalism are that ...

The benefits of capitalism are that the governments have limited control over other business, which lets business compete.

Right to sell blood, Singer suggests that although the right to sell blood ...

Singer suggests that although the right to sell blood does not threaten the formal right to give blood, it is incompatible with "the right to give blood, which cannot be bought, wh

Aplia, Hi, I need help with my Aplia macroeconomics problem sets.

Hi, I need help with my Aplia macroeconomics problem sets.

What is the value of the swap in terms of both bonds and fra, Suppose that ...

Suppose that the yield curve is flat at 5% per annum with continuous compounding. A swap with a notional principal of $100 million in which 6% is received and six-month LIBOR is pa

The budget line, The Budget Line: The Consumer Constraints The consumer...

The Budget Line: The Consumer Constraints The consumer would like to maximize his satisfaction by reaching the highest possible indifference curve. But in the process, he faces

Demand for the hotel''s rooms, Suppose that a particular large hotel has 79...

Suppose that a particular large hotel has 790 rooms. Furthermore, suppose that the demand for the hotel's rooms are normally distributed with a mean demand of 733 rooms with a stan

American households use a cell phone, It is reported that 16% of American h...

It is reported that 16% of American households use a cell phone exclusively for their telephone service. In a sample of eight households, find the probability that: A) None use a c

Calculate profit-maximizing price and quantity, A monopolist faces the foll...

A monopolist faces the following demand function for its product: Q = 45 - 5P The fixed costs of the monopolist are $12 and the variable costs are $5 per unit. a) What are the pro

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd