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AP Macroeconomics Mea 3 B a Define the Nominal and Real Interest Rate B Explain the Relationship Between Changes in Nominal Interest Rates Expected Questions

Distinguish nominal, expected real, and actual real interest rates, then use expected and actual inflation to calculate returns and borrowing costs.

Syllabus
Effective Fall 2022
Course
AP Macroeconomics

Exam points

  • distinguish a nominal interest rate from a real rate adjusted for inflation
  • calculate the actual real interest rate as nominal interest minus actual inflation
  • calculate nominal, expected real, or expected inflation using the Fisher relationship
  • predict how higher expected inflation raises nominal rates when the expected real rate is unchanged
  • explain how unexpected inflation changes the actual real return on a fixed-rate loan

AP Macroeconomics Mea 3 B a Define the Nominal and Real Interest Rate B Explain the Relationship Between Changes in Nominal Interest Rates Expected Questions question 1

[Maximum number: 3]

Inflation and expected inflation are important determinants of economic activity.

Question (a)

(a)

Given the increase in the expected rate of inflation from part (b),

[ 2 ]

Question (i)

(i)

will the nominal interest rate on new loans increase, decrease, or remain unchanged?

[ 1 ]

Question (ii)

(ii)

will the real interest rate on new loans increase, decrease, or remain unchanged?

[ 1 ]

Question (b)

(b)

Assume that the nominal interest rate is 8 percent. Borrowers and lenders expect the rate of inflation to be 3 percent, and the growth rate of real gross domestic product is 4 percent. Calculate the real interest rate.

[ 1 ]
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