INTRODUCTION TO MACROECONOMICS HOMEWORK # 5 15 points possible NAME ____________________ 1. A loaf of bread costs $2.00. Based solely on this information, what is the value of the dollar (in terms of loaves of bread)? ________________ If the price of a loaf of bread changes to $1.50, does the value of the dollar rise or fall? ________________ 2. Given the following information: Consumers are very optimistic about the future. The price of oil has just doubled. The money supply is growing at a 6% rate. The government has just cut spending by 8%. Firms are doubling their investment. The trade deficit has doubled in the last 6 months. Calculate the long-run rate of inflation. ________________ 3. Given the money supply is $1 trillion, the price level is 200, and real GDP is $5 trillion, calculate velocity. (The price index should be divided by 100 when used for this calculation.) ________________ 4. The growth rate of the money supply is 7%, the inflation rate is 3%, and velocity is constant. What is the growth rate of real GDP? ________________ 5. Suppose the real rate of interest is 3%, and the money supply is growing at 5%. If the growth rate of the money supply rises to 10%, then, according to the Fisher effect, what is the change in the real rate of interest? ________________ nominal rate of interest? ________________ 6. If the nominal interest rate is 8%, the expected inflation rate is 3%, and the tax rate is 25%, what is the after-tax real interest rate when taxes are paid on nominal interest income? _______________ the after-tax real interest rate when taxes are paid on real interest income? _______________
7. I lend you a $1,000 today and you agree to pay me $1,100 one year from today. You are going to buy a computer with the $1,000 that your borrow from me. You anticipate that if you wait a year to buy the computer, its price will rise to $1,070. What is the nominal interest rate on this loan? ______________ What is the expected inflation rate? ______________…