In: Economics
1. Assume you are a banker and want a 4.5% real rate of return on your loans. If you expectthat thelong-terminflation rate will average a2.5% over the next thirty years, whatinterestrate should you charge customers for a thirty-year fixed-rate mortgage? How would your answer change if you expected the inflation rate to average 4.5% over the length of the mortgage? Explainyour response using the appropriate formula/equationand your reasoning.
2. Assume you have the following information about the unemployment rate among different groups inthe labor force: adult males 5%, adult females 4.5%, and teenagers 12%. Teenagers account for 15% of the work force and, women account for 40% of the adult labor force. What is the actual nationwide unemployment rate?
1)
Rate should be charge = Real Interest rate +Inflation
= 4.5% + 2.5%
= 7%
Rate to be charged if Inflation is 4.5% = 4% + 4.5%
= 9%
2)
The actual nation wide unemployment rate
= 5%*40%+4.5%*(100%-40%-15%)+12%*15%
=5.825%