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olga55 [171]
3 years ago
7

Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a 2 percent real return per year. I

nstructions: Enter your responses as as whole numbers. a.The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 110 in one year and 121 in two years. What nominal rate of interest should Frank charge Sarah? The nominal rate of interest charged should be %. b. Suppose Frank and Sarah are unsure what the CPI will be in two years. How should Frank index Sarah’s annual repayments to ensure that he gets an annual 2 percent real rate of return. Frank should charge Sarah % the inflation rate.
Business
1 answer:
egoroff_w [7]3 years ago
8 0

Answer:

a. 23%.

b. Frank should charge Sarah 2% more than the inflation rate.

Explanation:

a. Find the nominal rate of interest.

To find this value we must follow this equation:

NI=RI+IR

Where NI = Nominal Interest, RI= Real Interest, and IR= Inflation Rate.

a.1. Find the real interest rate.

The problem statement gives us this value: 2% real return per year, as agreed by Sarah and Frank.

a.2. Find the inflation rate.

Here we follow this equation:

IR=(\frac{CPI_{F} -CPI_{B} }{CPI_{B} } )*100

Where:

CPI(F) is the CPI of the final year, in this case, it would be 121 (the expected CPI for two years, which is the established loan time).

CPI (B) is the CPI of the base year, that is, the CPI in force at the time that Frank makes the loan, 100 in this case.

We replace these values:

IR=(\frac{121-100}{100} )*100

IR=(\frac{21}{100} )*100

IR=0.21*100

IR=21%

The inflation rate equals 21%.

a.3. Replace in the equation of the nominal rate of interest.

NI=RI+IR

NI=0.02+0.21

NI=0.23

So, the nominal rate of interest Frank should charge Sarah equals 23%.

b. Find out how much Frank should charge Sarah (regarding inflation and considering that it is unknown).

The inflation rate reduces the return expected by Frank. Therefore, the nominal interest rate charged must be higher than the inflation rate, in order to ensure a positive real returns. In this case, since it is not known exactly what that inflation rate is, Frank must charge 2% (expected return) above what the inflation rate can record.

Hence, the short answer is: Frank should charge Sarah 2% more than the inflation rate.

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The money multiplier equalsa.1/(1 R), where R represents the quantity of reserves in the economy. b.1/(1 R), where R represents
sergeinik [125]

Answer:

b. 1/R, where R represents the reserve ratio for all banks in the economy

Explanation:

The reserve ratio can be define as the part of reservable liabilities that commercial banks must hold onto or have, rather than investing or borrowing out. This can be said to be a necessary requirement determined by every central bank of a particular country, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio.

Commercial banks in the U.S are required to hold reserves against their total reservable liabilities (deposits) which cannot be borrowed out by the bank. Example of reservable liabilities include non personal time deposits, net transaction accounts and Eurocurrency liabilities.

6 0
2 years ago
In its first month of operations, Sunland Company made three purchases of merchandise in the following sequence: (1) 200 units a
egoroff_w [7]

Answer:

$7.91

Explanation:

The weighted-average unit cost uses the weighted concept to determine the costs of goods sold or inventory costs. Its formula is a is below

weighted -average costs =  <u>costs of goods available for  sale</u>

      units available for sale

For Sunland company,

Total costs of goods available =(200 x $7) +(540 x $8) + (125 x$9)

=1400 + 4320+1125= 6845

Total units available for sale= $200 + $540 +$125 =$865

WAC = 8645/865

=$7.91

8 0
3 years ago
Tomasini Corporation has provided the following data from its activity-based costing accounting system:
Gelneren [198K]

Answer:

d. $192,000

Explanation:

The computation of the supervisory wages and factory supplies not be assigned is shown below:

= Supervisory wages × other percentage + factory supplies × other wages

= $780,000 × 10% + $380,000 × 30%

= $78,000 + $114,000

= $192,000

Hence, the correct option is d. $192,000

All other information i.e given in the question is not relevant Hence, ignored it

4 0
3 years ago
Explain how and why each of the following factors would influence current aggregate demand in the United States: a. increased fe
sukhopar [10]

The effects of the given factors on current U.S. aggregate demand would be:

  • a. Lower current aggregate demand (AD).
  • b. Higher current AD.
  • c. Higher current AD.
  • d. Higher current AD.
  • e. Lower current AD.

<h3>What affects Aggregate Demand?</h3>

When there is an increased fear of recession, aggregate demand drops as people want to save money for the recession. A higher price level will make things more expensive so AD drops as well.

When there is a fear of inflation, people increase spending so they can buy goods before prices increase.

Real income growth in other countries will lead to higher exports which will increase national wealth and therefore allow consumers to purchase more goods.

An reduction in real interest rates makes loans cheaper to be acquired and spent on consumption.

Find out more on aggregate demand at brainly.com/question/1490249.

#SPJ1

6 0
1 year ago
During which phase in the process must a firm allocate its factors of production?
Burka [1]
<span>In economics, the three stages of production are increasing average product production, decreasing marginal returns and negative marginal returns. It would be during the first stage that a firm must allocate its factors of production. Hope this answers the question.</span>
4 0
3 years ago
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