Question

Question 1 options:

The “prime” interest rate is the rate that banks charge their best customers. Nominal interest rates and inflation rates are given in the following table.

Year	Prime Interest Rate	Inflation Rate
1970	7.9%	5.7%
1974	10.8%	11.0%
1978	9.1%	7.6%
1981	18.9%	10.3%

Question 1 options:

The “prime” interest rate is the rate that banks charge their best customers. Nominal interest rates and inflation rates are given in the following table.

Year	Prime Interest Rate	Inflation Rate
1970	7.9%	5.7%
1974	10.8%	11.0%
1978	9.1%	7.6%
1981	18.9%	10.3%

a. In which of the years given would it have been best to be a lender? Year = ? when the Real Interest Rate was ? %
b. In which of the years given would it have been best to be a borrower? Year = ? when the Real Interest Rate was ? %.

2.Question 2 options:

Ethiopia has a GDP of $8 billion (measured in U.S. dollars) and a population of 55 million. Costa Rica has a GDP of $9 billion (measured in U.S. dollars) and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher.

Ethiopia = $?

Costa Rica = $?

The per capita GDP of ? is much lower than that of ? by ?

3.Question 3 options:

The Czech Republic has a GDP of 1,800 billion koruny. The exchange rate is 20 koruny/U.S. dollar. The Czech population is 20 million.

What is the GDP per capita of the Cz

Per capita GDP =

Per capita GDP in U.S. dollars = $

ech Republic expressed in U.S. dollars?

Answer 1

Real Interest Rate = Nominal Rate - Inflation Rate

1970 = 2.2%

1974 = -0.2%

1978 = 1.8%

1981 = 8.6%

Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.

The best year to be a lender is the year in which the difference between the lender's interest rate and the inflation is the highest and the best year for being a borrower is when it is the lowest

a) Best Year for lenders is 1981 as real interest is 8.6% which is best for lenders.

b)Best year for borrower is 1974 as real interest rate is -0.2%

2. Per Capita GDP = GDP / Population

Per capita GDP of Ethiopia = 8 billion / 0.055 billion = $145 billion

Per Capita GDP of Costa Rica = 9 / 0.004 = $2250 billion

Per Capita GDP of Costa Rica is higher.

Pet Capita GDP of Eithopis is much Lower than Costs Rica by $2105

3.Per Capita GDP of Czech = 1800 Billion / 0.02 Billion

= 90000 Koruny ( Expressed in Billion)

1 US $ = 20 Koruny

GDP in US$ = $4500 Billion