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

Models, give three example of models show endogenous and exogenous varibles...

give three example of models show endogenous and exogenous varibles

Explain the gaap-determine the impairment loss, Panzer is a U.S. company.  ...

Panzer is a U.S. company.  It originated in the 1970s as a family-owned business that manufactures fine watches. The family continued to build the company by reinvesting profits in

Makers respond to the crisis monetary policy, Did monetary policy contribut...

Did monetary policy contribute to the economic crisis of 2008? Why or why not? How did monetary policy makers respond to the crisis? Has their response created an environment for f

What do you mean by gross domestic product, Q. What do you mean by Gross do...

Q. What do you mean by Gross domestic product? Perhaps the most significant concept in macroeconomics is Gross Domestic Product (GDP): Gross Domestic Product (

Resulting market distortion, Consider a market for fish whose market demand...

Consider a market for fish whose market demand and market supply for fish are specified as Qd = 300 - 2.5 P and Qs = - 20 + 1.5 P respectively. The government decides to impose a p

Using a different method colleagues different solution, Consider the follow...

Consider the following homogenous difference equation: xt=b0+b1xt-1 a) Iterate backwards xt can be written in terms of xt-2. b) Now show xt can be written in terms of xt-3 a

Principal causes of high population growth, List and briefly describe the p...

List and briefly describe the principal causes of high population growth in developing countries and the major consequences.

Government can finance its budget deficit, A government can finance its bud...

A government can finance its budget deficit by doing all of the following except: A. borrowing from its central bank. B. printing money. C. selling bonds. D. buying bonds.

Example of fixed investment-accounting system, Example of Fixed Investment-...

Example of Fixed Investment-ACCOUNTING SYSTEM   Consider again the economy in example III. An inventor offers to construct some machines for each of the three companies which wo

Difference between Quantitative Easing and Monetary Policy, Why is quantita...

Why is quantitative easing used during liquidity trap when it lowers interest rates too?

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