Question

9. Core Inflation exeludes: 10. GIVEN: Nominal Income-S 400 Billion, CPI-125 % Wo 11, GIVEN: Real Interest Rate 4 %, Inflation Premium = 5 % Calculate the Nominal Interest Rate a bank should charge a borrower. Show All W 12. Who is hurt by inflation? Identify three parties who are hurt by inflation. 1. 2. 3. 13. Explain the 2 impacts which a nezative real interest rate creates relative to consumer spending. 1) 2)

Answer 1

9. Core inflation excludes the more volatile items like food and crude oil.

10. Real Income = Nominal Income/ CPI * 100 = 400/125*100 = $320

11. As per Fisher, Nominal Interest rate = Real Interest rate + inflation = 4% + 5% = 9%

12. Who is hurt by Inflation ?

Party 1 - Consumers - Higher inflation means, consumers have to pay more amount for the same quantity of goods. If his income doesn't increase proportionately then it would lead to a decrease in consumption or no consumption by the consumer

Party 2 - FDI - These investors invest in a particular country with an expected return. An increase in inflation within that country erodes the returns of the FDI and leads lessor investment in future as investment via FDI is in the creation of capacity so withdrawal is not that easy.

Party 3 - Government - A very high inflation erodes the purchasing power of currency so much that it leads to people loosing faith in the home currency. This leads to dollarization, wherein the currency of a foreign country is adopted as the home currency. The Country loses control over monetary policies. Thus, this lessons the available tools with a country to propel development

13. Two Impacts that negative interest rates create?

1. Negative interest rates are in response to a deflationary environment. Negative Interest rates decrease the value of money and lead to unnecessary spending on consumption for an individual.

2. A deflationary environment leads to decrease in value of currency