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# Assignment Example

Summary
Economy A offers better return on both nominal as well as real rates. Without any argument, when deciding where to lend money it is essential that nominal rates be used since interest rates rise…

## Extract of sample ""

Q1.A. Year Growth in Nominal GDP Growth in CPI 1995 - 4.20% 1996 839064 – 812460 812460) * 100 3.27 105.8 – 104.2 104.2) * 100 1.54%
1997
5.58%
1.70%
1998
3.48%
0.93%
1999
6.49%
1.75%
2000
8.28%
2.71%
Q1.B.
Year
Nominal GDP
Real GDP
Growth In Real GDP / Growth In Nominal GDP As A Result Of Real Growth
Growth In Nominal GDP As A Result Of Inflation
Million \$
Million \$
1995
812460
812460 / 104.2 * 100 = 779712
1996
839064
839064 / 105.8 * 100 = 793066
(((793066-779712) / 779712) * 100) = 1.71%
1.54%
1997
885022
885022 / 107.6 * 100 = 822511
3.71%
1.70%
1998
915865
915865 / 108.6 * 100 = 843338
2.53%
0.93%
1999
975263
975263 / 110.5 * 100 = 882591
4.65%
1.75%
2000
1056010
1056010 / 113.5 * 100 = 930405
5.42%
2.71%
Q2.A.
Year
Nominal Interest Rate (Economy A)
Real Interest Rate (Economy A)
Nominal Interest Rate (Economy B)
Real Interest Rate (Economy B)
2007
10.60%
10.6 / 107.60% = 9.85%
5.60%
5.6 / 102.6% = 5.46%
2008
7.50%
7.5 / 108.6% = 6.9%
4.50%
4.5 / 103.8% = 4.34%
2009
6.10%
6.1 / 116.5% = 5.24%
4.10%
4.1 / 104.5% = 3.92%
2010
7.60%
7.6 / 123.5% = 6.15%
3.60%
3.6 / 106.5% = 3.38%
It would be better to lend money money in economy A as it offers a greater return. Economy A offers better return on both nominal as well as real rates. Without any argument, when deciding where to lend money it is essential that nominal rates be used since interest rates rise and fall during the period of the loan and that is well depicted in the nominal interest rate figures. Therefore even though nominal rates of return are falling in economy A as compares to economy B, the money should be lent there as the rates are still better off then what economy B has to offer.
Q2.B.
The concept of fisher effect states that the real interest rates are equal to the nominate rate of interest less the inflation rate. Consequently, real interest rates are supposed to fall as the rates of inflation increase unless of course, nominal interest rates rise in line with the inflation.
The fisher effect is present in both economies A and B as we can observe that the real interest rates fall in both cases when inflation rates rise. Read More
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