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QUESTION In late 1980, the U.S. Commerce Department released new data showing inflation was 15%. At the time, the prime rate of interest was 21%, a record high. However, many investors expected the new Reagan administration to be more effective in controlling inflation than the Carter administration had been. Moreover, many observers believed that the extremely high interest rates and generally tight credit, which resulted from the Federal Reserve System’s attempts to curb the inflation rate, would lead to a recession, which, in turn, would lead to a decline in inflation and interest rates. Assume that, at the beginning of 1981, the expected inflation rate for 1981 was 13%; for 1982, 9%; for 1983, 7%; and for 1984 and thereafter, 6%. a. What was the average expected inflation rate over the 5-year period 1981–1985? (Use the arithmetic average.) b. Over the 5-year period, what average nominal interest rate would be expected to produce a 2% real risk-free return on 5-year Treasury securities? Assume MRP=0. c. Assuming a real risk-free rate of 2% and a maturity risk premium that equals $0.1 \times(t) \%$, where t is the number of years to maturity, estimate the interest rate in January 1981 on bonds that mature in 1, 2, 5, 10, and 20 years. Draw a yield curve based on these data. d. Describe the general economic conditions that could lead to an upward-sloping yield curve. e. If investors in early 1981 expected the inflation rate for every future year to be 10% (i.e., $\mathrm{I}_{\mathrm{t}}=\mathrm{I}_{\mathrm{t}+1}=10 \%$ for t=1 to $\infty)$, what would the yield curve have looked like? Consider all the factors that are likely to affect the curve. Does your answer here make you question the yield curve you drew in part c? Verified answer Other Quizlet setsRelated questionsWhich of the following ensures a good idea for a business is an actual business opportunity venture?Which of the following ensures a good idea for a business is an actual business opportunity? The idea solves a unique or want in the market that group of customers is WILLING to buy.
What is the definition of an entrepreneur Everfi?entrepreneur. An entrepreneur is someone who creates, owns, and potentially runs a business. an entrepreneur's salary is evaluated based on his ability to complete tasks assigned to him.
What is the main purpose of developing a business pitch Everfi?What is the main purpose of developing a business pitch? Correct Answer: To briefly share the most important info about your business to other people in an engaging way!
What is a variable expense Everfi answers?Variable Expense. An expense that is different from month to month. Fixed Expense. An expense that typically does not change month to month.
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Which of the following is not a creative thinking exercise entrepreneurs use to generate ideas?
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