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- A Wall Street Journal offered the following opinion of the bond market in September 2012, when inflation rate was about 2%: Ac€A?Someone buying long-term bonds yielding 1.5% or 2% and then seeing consumer price inflation of 4%, will be on the loosing end of the betAc€??. a. Explain verbally and illustrate graphically what will happen to the price of bonds if expected inflation increases to 4% from 2%. Be sure to include in your answer the demand the bond market. b. Explain why someone buying long-term bonds yielding 1.5% or 2% and then seeing consumer price inflation of 4%, will be on the loosing end of the bet. c. Suppose that you expect a greater increase in inflation than do others investors, but that you do not expect the increase to occur until 2015. Should you wait until 2015 to sell your bond? Briefly explain. d. The columnist also argued that long-term bonds would be a good investment if only Ac€A? when we get serious price deflationAc€?? Ac€?c *Explain verbally and illustrate…Assuming a tax rate of 40 percent, compute thebefore-tax real interest rate and the after-tax realinterest rate for each of the following cases.a. The nominal interest rate is 10 percent, and theinflation rate is 5 percent.b. The nominal interest rate is 6 percent, and theinflation rate is 2 percent.c. The nominal interest rate is 4 percent, and theinflation rate is 1 percent.The “prime” interest rate is the rate that bankscharge their best customers. Based on the nominalinterest rates and inflation rates in Table 19.10, inwhich of the years would it have been best to be alender? Based on the nominal interest rates and inflationrates in Table 19.10, in which of the years given wouldit have been best to be a borrower?
- Suppose that a borrower and a lender agree on thenominal interest rate to be paid on a loan. Theninflation turns out to be higher than they bothexpected.a. Is the real interest rate on this loan higher or lowerthan expected?b. Does the lender gain or lose from thisunexpectedly high inflation? Does the borrowergain or lose?c. Inflation during the 1970s was much higher thanmost people had expected when the decade began.How did this unexpectedly high inflation affecthomeowners who obtained fixed-rate mortgagesduring the 1960s? How did it affect the banks thatlent the moneyQuestron 3 Suppose the nominal interest rate is currently 24 per cent and expected inflation is 16 per cent. IF the expected inflastion rate doubles to 3.2 per cent, wtich of the foloving would be an implication of the Fisher effect? O The real interest ate talls by 1.6 per cent O The nominal interant rate doubies to 48 per cent O The nominal interast rate rises n 5.6 per cent O The nominal incerest rate des co 4.0 por centwhen the inflation rate is expected to increase, the real cost of borrowing ______ at any given interest rate; the supply of bonds _____ and the supply curve shifts to the _____. is either rise or decline increase or decrease left or right
- Taxes on Stock Gains and Inflation. Suppose you bought a stock for $100 and its value stayed constant in real terms. Over 10 years, the price of the stock in dollar terms has doubled. If you sold the stock after 10 years and your tax rate was 20.0%, how much tax would you owe? $. (Enter your response as a whole number.) The real tax burden on buying and then selling stocks tends to OA. increase with inflation because the nominal gain, on which the tax burden is based, decreases with inflation; but inflation increases the real gain. OB. increase with inflation because the nominal gain, on which the tax burden is based, increases with inflation; but inflation reduces the real gain. OC. decrease with inflation because the nominal gain, on which the tax burden is based, decreases with inflation; but inflation reduces the real gain. O D. decrease with inflation because the nominal gain, on which the tax burden is based, increases with inflation; but inflation reduces the real gain.If the expected inflation rate is 4 percent and the nominal interest rate is 9 percent, then the ex ante real interest rateIf an economy always has inflation of 10 percent peryear, which of the following costs of inflation will itNOT suffer?a. shoeleather costs from reduced holdings of moneyb. menu costs from more frequent price adjustmentc. distortions from the taxation of nominal capitalgainsd. arbitrary redistributions between debtors andcreditors
- Suppose in an economy PAE = 2500+.75Y-15000r. If target inflation is 2% and potential output is 5200, the central bank will set a nominal interest rate of % when the economy is at potential.If inflation rises unexpectedly by 5%, indicate foreach of the following whether the economic actor ishelped, hurt, or unaffected:a. A union member with a COLA wage contractb. Someone with a large stash of cash in a safedeposit boxc. A bank lending money at a fixed rate of interestd. A person who is not due to receive a pay raise foranother 11 monthsThe real interest rate is 6 percent a year and the income tax rate is 50 percent. With no inflation, what is the real after-tax interest rate? If the inflation rate rises to 4 percent a year, what is the real after-tax interest rate?