Suppose the nominal annual interest rate on a two-year loan is 8 percent and lenders expect inflation to be 5 percent in each of
1 answer:
You might be interested in
Answer:
nominal interest rate = 5%
real interest rate = 3%
Explanation:
given data
deposit previous = $2,000
deposit present = $2,100
CPI consumer price index rises = 200 to 204
to find out
nominal interest rate and real interest rate
solution
we get here first nominal interest rate that is express as
nominal interest rate = ( deposit present - deposit previous ) ÷ deposit previous × 100 ..........................1
put here value we get
nominal interest rate = × 100
nominal interest rate = 5%
and
now we get here inflation rate that is
inflation rate = ( CPI present - CPI previous ) ÷ CPI previous × 100 .............2
inflation rate = × 100
inflation rate = 2%
and
real interest rate will be as
real interest rate = nominal interest rate - inflation rate .................3
real interest rate = 5% - 2%
real interest rate = 3%
A- The net earnings of the individual in question will be $710000 after the individual's claim for loss by fire is settled by the insurance company. B- Yes, he would buy the insurance if he were risk neutral.
C- Yes, the individual will buy the insurance policy if he were a expected utility maximizer as he would want to claim complete settlement of this amount to be claimed in case of fire loss.
- The expected net earnings from the insurance after deducting the amount from the premium paid and total claim endorsed by the insurance company will be $710000 which can be shown as below
We get,
- If the individual were risk neutral he would like to take the insurance as the risk of fire in the example given above is 0.5 which is greater than zero and this ultimately implies that <u>risk cannot be taken.</u>
- In the case if the individual is expected utility maximizer he would take the insurance as it would not only give him the claims from losses due to fire but also help him secure his house against beta of fire.
Hence, the correct answers will be A- $710000; B- Yes.; C- Yes. and imply that taking insurance will be a wise decision by the individual.
To know more about insurance policy , click the link below.