B. In the year 2007, the Zimbabwe economy was estimated to have an inflation rat

Question

B. In the year 2007, the Zimbabwe economy was estimated to have an inflation rate of 66,000 percent (i.e., =660). (That is, prices were 660 times higher by the end of the year!) What nominal annual interest rate would a Zimbabwe lender making a loan and expecting repayment in Zimbabwe dollars at the end of the year need to charge in order to get a real interest rate of 5 percent? Use the exact formula for the real interestrate. If instead the lender used the approximation formula, what nominal interest rate would have been charged?

Explanation / Answer

Annual Inflation rate = (1+Monthly inflation rate)^12 -1

=(1+660)^12-1

=1.764

Real rate of return = [(1 + Nominal rate of return) / (1 + Rate of Inflation)^1

   =[1+0.05)/(1+1.764)^1

   =0.3799 or 37.99%

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.