Question

23, Refer to Figure 7-1. Based on the figure, a the price level has fallen since 1965 b. the price level in 1985 was low er than in 1980 c. the price level fell from 1980 to 1990 d the price level has not fallen since 1965 e. the base year is 1965 24. Parvez is trying to decide whether or not he should lend $1,000 to li for a year. li would pay a fixed nominal interest rate of 8 pereent. Parvez expeets the inflation rate to be 4 percent for the year. If he does not lend the $1,000 to i, Parvez will purchase an indexed savings bond that pays an interest rate of 4 percent, or he will put the money in a (noníndexed) savings account earning 6 percent. Parvez a will earn 4 percent in real terms if he loans Eli the money, 0 percent in real terms if he buys the bond, and 6 percent in real terms if he puts the moncy into a savings account b. is better off hokding his money as cash c b mdifferent betw een knding the money to Eli and buying the bond because the real imterest rate is the same in either case d. shoukd purchase the bond because it earns the highest real rate of interest e earns the highest real rate of interest if he puts his $1,000 into a savings account nt and the inflation rate is 10 percent, what 25. If you borrow money at a nominal interest rate of 5 pere real interest rate will you pay? a. -5 percent b. 0.5percent c. 2 percent d 5 percent c. 10 percent

Answer 1

Is indifferent between lending the money to eli and buying the bond because the real interest rate is the same in either case. Option C. Because when he lends to Eli, the real interest rate is 4 % i.e, nominal interest rate - inflation rate = 8 - 4 = 4 % and when he buys bond the interest rate is 4 % 25. Real interest rate = Nominal interest rate - inflation ration = 5 - 10 = -5 % Option A rightarrow -5 persent.