Answer all of these questions with the right question number next to the correct choice .

7-Real interest rates measure the actual return an investor expects to receive after subtracting the effects of inflation and other risks from a stated (nominal) rate of return. When numbers are low, say less than 10%, we can approximate the relationship between nominal rates (k), real interest rates (k*) and inflation for a default risk-free asset (i.e., T-Bills) by the Fisher approximation k_RF = k* + IP, where IP is compensation for expected inflation (an inflation premium). Suppose k= 0.25% and IP = 1.25%. What is the real interest rate the investor in the T-Bill will receive?

Group of answer choices

-1%

-1.5%

1%

1.5%

8-Suppose Kauai has a bartering economy based on chickens. That is, the residents of Kauai use chickens as a bartering commodity. As you enter the economy, you have an expectation that if you borrow 10 chickens, you stand ready to repay 13 chickens in 1 year. Would you borrow at the currently offered market interest rate in Kauai of 50%?

Group of answer choices

Yes, because 50% is less than your MRS.

No, because your rate of time preference for consumption is greater than the interest rate.

Yes, because your production possibilities indicate that you can produce 3 more chickens than you expect to borrow (13 - 10).

No, because 50% is more than your rate of time preference.

9-Thanks to your stellar performance on the job, your supervisor awards you a bonus of $1,000. However, things are tight for the company because of recent restructuring, so your supervisor informs you that you may get a bonus of $4,500 next year if you forego your bonus this year. If you accept this offer, what MRS have you revealed?

Group of answer choices

22.22%

4.5%

0.22%

450%

10-In Benton, a fictitious country, fish are employed for bartering purposes. The going rate is 5 fish loaned today in return for 10 fish in 1 month. What is Benton's real interest rate today?

Group of answer choices

100%

2%

200%

11-Real interest rates measure the actual return an investor expects to receive after subtracting the effects of inflation and other risks from a stated (nominal) rate of return. When numbers are low, say less than 10%, we can approximate the relationship between nominal rates (k), real interest rates (k*) and inflation for a default risk-free asset (i.e., T-Bills) by the Fisher approximation k_RF = k* + IP, where IP is compensation for expected inflation (an inflation premium). Suppose k= 0.25% and IP = 1.25%. Why would an investor agree to "pay" or diminish his real return by acquiring this T-Bill (i.e., lending money to the Treasury of the US and paying interest to the Treasury, not receiving interest)?

Group of answer choices

A)Investors become risk averse in uncertain times and may seek the safe liquidity of the T-Bills, even at a cost.

B)Investors keep misreading the market and negative rates result consistently from market efficiency hypotheses

investors know that negative real rates are a rarity and expect the real rate to turn positive in the short-term

When real rates become negative, investors may become less risk averse and desire to gamble on the T-Bill price going up

1%