Real and nominal rates interest Zane Perelli currently has $120 that he can spen
ID: 2384427 • Letter: R
Question
Real and nominal rates interest Zane Perelli currently has $120 that he can spend today on polo shirts costing $30 each. Alliteratively, he could invest the S120 in a risk-free U.S. Treasury security that is expected to earn a 13% nominal rate of interest. The consensus forecast of leading economists is a 6% rate of inflation over the coming year. How many polo shirts can Zane purchase today? How much money will Zane have at the end of 1 year if he forgoes purchasing the polo shirts today? (Ignore taxes.) How much would you expect the polo shirts to cost at the end of 1 year in light of the expected inflation? Use your findings in parts b and c to determine how many polo shirts (fractions are OK) Zane can purchase at the end of 1 year. In percentage terms, how many more or fewer polo shirts can Zane buy at the end of 1 year? What is Zane's real rate of return over the year? how is it related to the percentage change in Zane's buying power found in part d? Explain.Explanation / Answer
Answer:a $120/$30=4 shirts
Answer:b $120*(1.13)=135.6
Answer:c $30*(1.06)=31.8
Answer:d 135.6/31.8
=4.2641509/4
=1.06603
=6.6% more shirts
Answer:e (1.13/1.06)-1=6.6%
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