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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 questionsWhy is it important to use the information gathered from your market research on your target market segment?Market research can identify how customers and potential customers might view your business and identify gaps in customer expectations. This is powerful information to have when completing your marketing strategy. Having good market intelligence helps to minimise risks when making key business decisions.
What is the definition of an entrepreneur EverFi Quizizz?Someone who manages a business. Someone who creates, owns, and potentially runs a business.
What kind of research would be used to effectively evaluate a potential business opportunity?What kind of research should she do to effectively evaluate her potential business opportunity? Conduct market research to determine whether her business idea is a business opportunity that its a consumer need or want.
Which of the following ensures a good idea for an actual business opportunity to a particular business?Q. Which of the following ensures a good idea for a business is an actual business opportunity? The idea solves a unique need or want in the market that a group of customers is willing to buy.
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Which of the following should you NOT do when collecting and evaluating data on your market everfi
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