Assignment
1. If the nominal interest rate in year t is 10%, and the expected inflation rate for year t+1 is 2%, then the real interest rate in year t is approximately ___%.
A. 2 B. 3 C. 5 D. 8 E. 12
2. With a nominal interest rate of 20%, the present (discounted) value of $600 to be received in one year (that is, 2018) is $ ____.
A. 400. B. 500 C. 600 D. 620 E. 720
For questions 3-4, consider the three sequences of incomes below ( P, Q, and R). Each sequence provides a stream of incomes for you, specified below, over the three years.
P Q R
2017 $520 $500 $480
2018 $500 $500 $500
2019 $480 $500 $520
3. Assume that the interest rate is 1%. If we rank the three sequences of payments according to their present value of sequence of payments over the three years,
A. P > Q > R. B. R > Q > P. C. P > R > Q. D. R > P > Q.
4. Assume that the interest rate is 3%. If we rank the three sequences of payments according to their present value of sequence of payments over the three years,
A. P > Q > R. B. R > Q > P. C. P > R > Q. D. R > P > Q.
5. With a nominal interest rate of 3.75%, a deposit of $500 this year will be $___ next year.
A. 435 B. 467 C. 487 D. 500 E. 519
6. A building generates a rental income of $1M per year, starting from next year, forever. If the interest rate is 10%, the fundamental value of this building is $___M.
A. 1 B. 10 C. 50 D. 100
7. A building generates a rental income of $1M per year, starting from next year, forever. Assume that the interest rate is 10%. You better purchase the building if the price of the building is $___M.
A. 8 B. 12 C. 50 D. 100
8. In the short run, the real interest rate and the nominal interest rate tend to move in the same direction, because inflation expectation ___ in the short run.
A.increases. B. decreases C. does not change
9. The real interest rate is 5%, and expected inflation is 5%. Assume that you deposit $100 in your savings account today for one year. When you withdraw your money from your savings account next year, the money you withdraw will enable you to buy ____ goods and services next year than the $100 enables you to buy today.
A.more B. fewer C. the same
10. You deposit $100 in your savings account today for one year. You will receive more than $100 from your savings account next year as long as
A. the nominal interest rate for the savings account is positive.
B. the real interest rate for the savings account is positive.
C. the expected inflation is positive.
D. the real interest rate for the savings account exceeds the nominal rate for the savings account.
11. You have to pay a tax of $500 at any time between 1/1/2017 and 4/15/2017. It is your best interest to pay it at ____
A. 1/1/2017. B. 4/15/2017. C. any time.
12. In the short run, a tax cut causes ______ in the nominal interest rate and ____ in the real interest rate.
A. an increase, an increase. B. an increase, a decrease. C. an increase, no change
D. a decrease, an increase. E. a decrease, a decrease. F. a decrease, no change
13. In the medium run, a tax cut causes ______ in the nominal interest rate and ____ in the real interest rate.
A. an increase, an increase. B. an increase, a decrease.
C. an increase, no change D. a decrease, an increase.
E. a decrease, a decrease. F. a decrease or an increase, a decrease
14. Suppose that the Fed cuts money supply. Discuss the effect of this policy on the nominal interest rate, the real interest rate, and output in the short run. In discussing, use an IS-LM graph with correctly labeled curves and axes. If a curve or curves shift in a certain way, explain why the curve or curves shift that way.
15. Repeat question 14 in the medium run. Do not use a graph, but use Y = C+I+G in your explanation.
16. Explain your answer to question 3. In your explanation, do not calculate or use the present value.