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4) Why might it be expected that an increase in interest rates will tend to reduce inflation?
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- 2. How does a very high rate of inflation affect individual spending and saving? Explain your answer.1. Paul and Mary wanted to get married, and they wished to purchase a house for the new family. Therefore, they had arranged a meeting with a banker to know more about the mortgage details. They all expected that inflation will be 3 percent over the borrowing period, and the banker offered them a nominal interest rate of 6 percent. As it turns out, the inflation was 5 percent over the term of the loan. a. What was the expected real interest rate? b. What was the actual real interest rate? c. Who benefited and who lost because of the unexpected inflation?23) How might big companies ,such as Walmart, avoid contributing to inflation when raising employees wages ?
- What can be a reason why inflation is not occuring when government spending increases in an economy?what is the meaning of inflation3b. Suppose a country has a money demand function (M/P)d kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. What is the average inflation rate?
- 4 If inflation is so easy to explain, why do policymakers sometimes have trouble ridding the economy of it?Why do we need to calculate the average inflation rate?12. Holding other factors constant, an unexpected increase in the rate of inflation will have no effect on the 'real' interest rate. tend to hurt lenders because it will reduce their 'real' rate of return. increase the 'real' interest rate. tend to hurt borrowers if their incomes rise at the same rate as inflation. do none of the other options.
- What do you mean by inflation? What are the causes of inflation?3. Answer the following questions with the help of graphs: a. If interest rates are expected to continue to decrease in the foreseeable future, what should happen to interest rates today? b. If expected inflation decreases, how would interest rates be affected?4. You have the assignment of making a recommendation to the Chairman of the Fed during a period of persistent, high inflation. What could you do to restore stable prices?