Problem 1: Given the following data, calculate the real interest rate for years 2, 3, and 4. (Assume that each CPI number tells us the piece level at the end of each year.)
Year CPI Nominal Interest Rate Real Interest Rate
1 100 --------- --------
2 110 15% ___________
3 120 13% ___________
4 115 8% ___________
Problem 2: If you lent $200 to a friend at the beginning of year 2 at the prevailing nominal interest rate of 15%, and your friend returned the money - with the interest - at the end of year 2, did you benefit from the deal?
This problem is related to the readings on the banking system, the Federal Reserve, and monetary policy.
Suppose the required reserve ratio is 0.2. If an extra $20 billion in reserves is injected into the banking system through an open market purchase of bonds, by how much can demand deposits increase? Would your answer be different if the required reserve ratio were 0.1? What would that number be?