1. Long-run real interest rates are expected to increase. An accountant and an M
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Question
1. Long-run real interest rates are expected to increase. An accountant and an MBA student (who just finished his course of Managerial Economics) where interviewed regarding the effect on the firm they both work at. Keeping all else constant, their answer would likely differ. How do you guess the interviewed will answer? Does the difference in response matters? If yes, why? If not, why not?
2. Many cities have experienced a substantial decrease in the amount of garbage being collected after they changed from levying a tax on each household to pay for the pickup to charging a fee for each bag or can picked up. Would this have been the result of a change in Demand? If so, why; if not, why not? If not, what was the probable reason?
4. A magazine, in an article dealing with management, wrote,
Explanation / Answer
1Definition of 'Real Interest Rate' An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender. The real interest rate of an investment is calculated as the amount by which the nominal interest rate is higher than the inflation rate. Real Interest Rate = Nominal Interest Rate - Inflation (Expected or Actual) The real interest rate is the growth rate of purchasing power derived from an investment. By adjusting the nominal interest rate to compensate for inflation, you are keeping the purchasing power of a given level of capital constant over time. For example, if you are earning 4% interest per year on the savings in your bank account, and inflation is currently 3% per year, then the real interest rate you are receiving is 1% (4% - 3% = 1%). The real value of your savings will only increase by 1% per year, when purchasing power is taken into consideration. 2 yes 4 yes
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