ECON 230 Regent University Week Inflation Assignment 4

Week 4- ASSIGNMENTS (3 & 4)

Assignment 3

Section A

1.Calculate inflation in the following cases (50 POINTS):

Price Level Last Year ($)

Price Level This Year ($)

Inflation Rate

100

110

250

300

4,000

4,040

8000 8050

12045 13159

Section B (This adds up to 50 points)

2. Ifthenominalinterestrate is5percentandtherealinterestrate is2percent, thentheinflationpremiumis __________________

3.Ifboththerealinterestrate andthenominalinterestrate are3percent,thenthe

A.inflationpremiumiszero.

B. realGDPmust exceedthenominalGDP.

C. nominalGDP must exceedtherealGDP.

D. inflationpremiumalsois3percent.

4. Supposethenominalannualinterestrateonatwo-yearloanis8percentand lenders expectinflationto be 5percentineachofthetwoyears.Theannual real rateofinterestis

5.. Supposethatlenderswantto receivearealrateofinterestof5percentand thattheyexpectinflationtoremainsteadyat2percentinthecomingyears.Basedonthis,lendersshouldchargeanominalinterestrateof ___________________________

Assignment 4

Section A (Each question is 10 points)-EXPLAIN your ANSWERS FOR THE FOLLOWING QUESTIONS USING ECONOMIC THEORIES AND CONCEPTS.

  • Who gets helped by a surprise inflation: people who owe money or people who lend money?
  • Who is more likely to lobby the government for fast money growth: people who have mortgages or people who own banks that lent money for those mortgages?
  • Consider the interaction between inflation and the tax system (assume the inflation is expected). Does high inflation encourage people to save more or discourage saving? If a government wants to raise more tax revenue in the short run, should it push for higher or lower inflation?
  • Which tells me more about how many more goods and services I can buy next year if I save my money today: the nominal interest rate or the real interest rate? Which interest rate gets talked about more in the media?
  • Why is it so painful to get rid of inflation? Why can’t the government just stop printing so much money?

Section B (10 POINTS EACH)

In the following cases, will real growth rise, fall, or remain unchanged according to the New Keynesian model (50 POINTS)? Students have to explain the answers they select for full credit.

a) Expected inflation 5%,

Actual inflation 8%

b) Expected inflation 8%

Actual inflation 1%

c)Expected inflation 6%,

Actual inflation 6%

d)Expected inflation 7%,

Actual inflation -4%

e) Expected inflation -1%,

Actual inflation 0%