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Microeconomics, 9/e

Campbell R. McConnell, University of Nebraska, Lincoln
Stanley R. Brue, Pacific Lutheran University
Thomas P. Barbiero, Ryerson Polytechnic University

Rent, Interest, and Profits

Internet Application Questions


1		Go to www.statcan.ca/English/Pgdb/Economy/Economic/econ46.htm, and also to: http://www.statcan.ca/english/Pgdb/econ07.htm then use the data to answer the following questions. What is the difference between the nominal interest rate and the real interest rate? Do the Bank Rates listed in the Statistics Canada table represent nominal or real interest rates? Explain.



2		Use the tables given to calculate Canada's real interest (bank) rate from 1997-2000? Do you notice a pattern?



3		It is advertised on television that a given bank pays four percent interest per year on deposits. Suppose you place $1,000 in this bank on January 1, 2001. If the CPI increases by five percent during 2001, what will your deposit be worth on January 1, 2002 (in nominal terms)? Calculate your real interest rate, and explain whether you will be better or worse off as a result of the one-year investment.



4		How would the above situation affect the pure interest rate, and the level of business investment? Explain.



5		From January, 2001 to July, 2001, the U.S. Central Bank (The Federal Reserve) lowered interest rates six times as it was concerned about the threat of a recession. Would the Federal Reserve have to increase or decrease the supply of loanable funds to reduce the equilibrium interest rate? Explain. All else equal, how should the level of business investment be affected by the Federal Reserve's actions? Explain.



6		How would consumer spending be affected by the Federal Reserve's decreasing the pure interest rate? Explain.

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