PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 15, Problem 8RQ
Why, in the absence of public beliefs that the central bank is committed to maintaining low inflation, does an adverse inflation shock pose a particularly difficult dilemma for policymakers? (LO3)
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Antonio receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for
the inflation rate.
The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario.
Given the real interest rate of 4.5% per year, find the nominal interest rate on Antonio's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario.
Inflation Rate
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After-Tax Nominal Interest Rate
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Real Interest Rate
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After-Tax Real Interest Rate
(Percent)
(Percent)
(Percent)
2.0
4.5
4.5
9.5
Compared with lower inflation rates, a higher inflation rate will
quantity of investment in the economy and
the after-tax real interest rate when the government taxes nominal interest income. This…
Suppose that the level of unemployment in the economy is determined by the follow equation:
U = 7.55 1.88*(i - ie)
Where U is the unemployment rate, i is the actual inflation rate, and it is the expected inflation
rate. All variables are entered in percentage form (e.g. if inflation is 30.57%, you plug in 30.57 for i,
not 0.3057).
Last year, the inflation rate was 7.87%, and people have adaptive expectations. What does the
inflation rate need to be this year in order for the unemployment rate to be 2.81%?
Note: Everything is already in percentage form. You do not need to multiply or divide by 100 at any point.
Enter in your answer as it is calculated in the equation.
Round your final answer to two decimal places.
Raphael receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 2.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate.
The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario.
Given the real interest rate of 2.5% per year, find the nominal interest rate on Raphael's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario.
Inflation Rate
(Percent)
Real Interest Rate
(percent)
Nominal Interest Rate
(Percent)
After-Tax Nominal Interest Rate
(Percent)
After-Tax Real Interest Rate
(percent)
2.0
2.5
7.5
2.5
Chapter 15 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
Ch. 15.A - Prob. 15A.1CCCh. 15 - Prob. 1RQCh. 15 - Prob. 2RQCh. 15 - Prob. 3RQCh. 15 - Prob. 4RQCh. 15 - Prob. 5RQCh. 15 - Prob. 6RQCh. 15 - Prob. 7RQCh. 15 - Why, in the absence of public beliefs that the...Ch. 15 - Prob. 9RQ
Ch. 15 - Prob. 10RQCh. 15 - Prob. 1PCh. 15 - For the economy in Problem 1, suppose that...Ch. 15 - Prob. 3PCh. 15 - Prob. 4PCh. 15 - For each of the following, use an AD-AS diagram to...Ch. 15 - Prob. 6PCh. 15 - Suppose that a permanent increase in oil prices...Ch. 15 - An economy is initially in recession. Using the...Ch. 15 - Prob. 9PCh. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 15.1CCCh. 15 - Prob. 15.2CCCh. 15 - Prob. 15.3CCCh. 15 - Prob. 15.4CCCh. 15 - Prob. 15.5CCCh. 15 - Prob. 15.6CCCh. 15 - Prob. 15.7CCCh. 15 - Prob. 15.8CCCh. 15 - Prob. 15.9CCCh. 15 - Prob. 15.10CC
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