A Lender Expects to Earn a Real Interest Rate of 4.5

question 73

Essay

A lender expects to earn a real interest rate of 4.5% over the next 12 months. She charges a
9.25% (annual) nominal rate for a 12-month loan. What inflation rate is she expecting? If the lender is in a 30% marginal tax bracket, the borrower in a 25% marginal tax bracket, and they both have the same inflation expectations, what are the real after-tax rates each expects?

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Definitions:

Average Total Cost

The total cost of production (fixed plus variable costs) divided by the number of goods produced, essentially the per unit production cost.

Average Variable Cost

The total variable costs (like materials and labor) divided by the quantity of output produced, indicating the cost of producing each unit.

Fixed Capital

Long-term assets used in the production of goods and services, such as buildings, machinery, and equipment.

Variable Labor

Labour costs that vary directly with the level of production or output in a business.