1. Long-run real interest rates are expected to increase. An accountant and an MBA student (who...

Question

1. Long-run real interest rates are expected to increase. An accountant and an MBA student (who just
finished his course of Managerial Economics) were interviewed regarding the effect of this increase.
Keeping all else constant, their answer would likely differ. How do you guess the interviewed will
answer? Does the difference in response matters? If yes, why? If not, why not? (20 points)
A real interest rate is basically nominal interest rate adjusted for inflation rate. An increase in expected
eal interest rate could be due to an expected increase in nominal interest rate or an expected decline in
inflation rate.
Now, an accountant’s role is limited to capturing the financial records of a business in a systematic
fashion. His response is likely to be that the a firm’s interest payments will increase due to an increase in
eal interest rates and the same will be reflected in the account books. Thus, his response will be from
the vantage point of capturing the information in the account books and financial statements.
For an...

Robert · Accepted Answer

1. Long-run real interest rates are expected to increase. An accountant and an MBA student (who just 
finished his course of Managerial Economics) were interviewed regarding the effect of this increase. 
Keeping all else constant, their answer would likely differ. How do you guess the interviewed will 
answer? Does the difference in response matters? If yes, why? If not, why not? (20 points) 
A real interest rate is basically nominal interest rate adjusted for inflation rate. An increase in expected 
real interest rate could be due to an expected increase in nominal interest rate or an expected decline in 
inflation rate. 
Now, an accountant’s role is limited to capturing the financial records of a business in a systematic 
fashion. His response is likely to be that the a firm’s interest payments will increase due to an increase in 
real interest rates and the same will be reflected in the account books.  Thus, his response will be from 
the vantage point of capturing the information in the account books and financial statements.

1. Long-run real interest rates are expected to increase. An accountant and an MBA student (who just finished his course of Managerial Economics) were interviewed regarding the effect of this...

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