Intermediate Microeconomics · free preview
Inflation and the Real Rate
Nominal rates and inflation combine into the real rate, one plus rho equals one plus r over one plus i, roughly the difference when both are small, and only real rates steer real consumption plans.
1. Two prices for time
Two prices for time
2. The budget in real terms
The budget in real terms
3. The Fisher equation in markets
The Fisher equation in markets
4. Choosing patience under inflation
Choosing patience under inflation
5. The exact real rate
With nominal r of 10 percent and inflation i of 5 percent, what is the exact real rate?
6. Equivalent setups
Which pair gives the same real budget as 10 percent nominal under zero inflation?
7. Fisher logic
According to the Fisher equation, what happens to nominal rates when expected inflation rises one point?
8. Surprise redistribution
Inflation comes in above expectations. Who gains?
9. The real rate
With r 10 percent and i 5 percent, compute the exact real rate in percent, rounded to two decimals, and write the number.
10. Real growth of savings
A saver earns 21 percent nominal during 10 percent inflation, compute the real rate in percent, rounded to one decimal, and write the number.
11. The approximation's error
With nominal 10 percent and inflation 5 percent, the exact real rate is 4.76 percent. What does the subtractive approximation give?
12. Surprise inflation revisited
A one-year loan is set at 10 percent nominal with 5 percent inflation expected. Inflation actually runs at 10 percent. What is the lender's real return?
13. Falling prices
With nominal 5 percent and deflation of 2 percent, prices falling, what is the exact real rate?
14. The illusion test
Which is better for a saver, 21 percent nominal with 10 percent inflation, or 11 percent nominal with stable prices?
15. Real rate at 15 and 5
With nominal 15 percent and inflation 5 percent, compute the exact real rate in percent, rounded to two decimals, and write the number.
16. Real rate at 6 and 2
With nominal 6 percent and inflation 2 percent, compute the exact real rate in percent, rounded to two decimals, and write the number.
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