A Few Quick Economic Questions, Please Help!?

Question

1. Assume that a series of inflation rates is 1 percent, 2 percent, and 4 percent, while nominal interest rates in the same three periods are 5 percent, 5 percent, and 6 percent, respectively.

a. What are the ex post real interest rates in the same three periods?

b. If the expected inflation rate in each period is the realized inflation rate in the previous period, what are the ex ante real interest rates in periods two and three?

c. If someone makes a loan (is a lender) in period two, based on the ex ante inflation expectation in part b, will he or she be pleasantly or unpleasantly surprised?

2. Assume that the demand for real money balance (M/P) is M/P = 0.6Y –100i, where Y is national income and i is the nominal interest rate. The real interest rate r is fixed at 3 percent by the investment and saving functions. The expected inflation rate equals the rate of nominal money growth.

a. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be?

Answer 1

1:

a)

1.05/1.01=1.0396=3.96%

1.05/1.02=1.0284=2.84%

1.06/1.04=1.0192=1.92%

b)

1.05/1.01=1.0396=3.96%

1.06/1.02=1.0392=3.92%

c)

Unpleasantly - because ex post real interest rate is less than ex ante.

2:

a)

i=r+π =1.03*1.01=1.0403=4.03%

i=4.03%

Further there two options - depending on what sort of inflation form they mean in equation:

(x)

M/P=0.6*1'000-100*(1.0403)= 600-104.03

M=100*1.01=101

101/P= 600-104.03=495.97

P=101/495.97 = 0.20364

(y)

M/P=0.6*1'000-100*(0.0403)= 600-4.03 = 595.97

M=100*1.01=101

101/P= 595.97

P=101/595.97 = 0.1695

The rest I will check after a dinner.