Question

In: Economics

1. Assume you are a banker and want a 4.5% real rate of return on your...

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?

Solutions

Expert Solution

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%


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