Question

Homework Ch. 12 lation and the antity Theory of Money There is a persistent fear that there will be a high level of deflation. Many economists warn that it may be worse for the economy than if there is high inflation Suppose that Herb is in debt and has to pay a 4.75% nominal interest rate. He expected inflation to be 2 SOVE. Instead, inflation is - 3.00 (deflation What is the real interest rate that Herb expected to pay Round your answer to two decimal places What is the real interest rate that Herb is actually paying? Round your answer to two decimal places. Because the y is experiencing defation of -1.00% instead of inflation of 2 Herb's real interest rate, compared to what he expected to pay has decremed, so Herb fools richer increased, so Herb feels richer decreased, so Herb feels poner increased, so Herb feels power SAMSUNG

Answer 1

a) Real interest rate expected to pay = Nominal interest rate - expected inflation rate

or, Real interest rate expected to pay = 4.75% - 2.50%

or, Real interest rate expected to pay = 2.25%

b) Real interest rate actually paying = Nominal interest rate - actual inflation rate

or, Real interest rate actually paying = 4.75%-(-3%)

or, Real interest rate actually paying = 7.75%

c) Real interest rate which he actually pays has increased in comparison to real interest rate he expected to pay. Thus, he feels poorer. Only option d is correct.