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Regent University Week 4 Inflation Calculation Questions Response

Regent University Week 4 Inflation Calculation Questions Response

Question Description

Week 4- ASSIGNMENTS (3 & 4)- Show workings for full credit

Assignment 3

Section A

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

Price Level Last Year ($)

Price Level This Year ($)

Inflation Rate







8000 8050

12045 13159

Section B (This adds up to 50 points)

2. If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is __________________

3.If both the real interest rate and the nominal interest rate are 3 percent, then the

A. inflation premium is zero.

B. real GDP must exceed the nominal GDP.

C. nominal GDP must exceed the real GDP.

D. inflation premium also is 3 percent.

(Show workings)

4. Suppose the nominal annual interest rate on a two-year loan is 8 percent and lenders expect inflation to be 5 percent ineach of the two years. The annual real rate of interest is___________

5. Suppose that lenders want to receive a real rate of interest of 5 percent and that they expect inflation to remain steady at 2percent in the coming years. Based on this, lenders should charge a nominal interest rate of ___________________________

Assignment 4


  • Who gets helped by a surprise inflation: people who owe money or people who lend money? And what is the relationship between federal funds rate and inflation?
  • 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)-Show workings for full credit

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%

Modern Principles of Economics 4TH 18


Cowen, Tyler / Tabarrok, Alex






4TH 18


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