r 1 = 5.5% r 2 = 5.9% r 3 = 6.6% r 4 = 7.4% Assuming a constant real interest ra
ID: 2709066 • Letter: R
Question
r1 = 5.5% r2 = 5.9% r3 = 6.6% r4 = 7.4%
Assuming a constant real interest rate of 2 percent, what are the approximate expected inflation rates for the next four years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Consider the following spot interest rates for maturities of one, two, three, and four years.r1 = 5.5% r2 = 5.9% r3 = 6.6% r4 = 7.4%
Assuming a constant real interest rate of 2 percent, what are the approximate expected inflation rates for the next four years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
1+I = (1+R) (1+pie) I = real interest Rate Pie = Inflation Rate Inflation rate = 1+i/1+r -1 r1=5.5% Inflation = 1+.02/1+.055-1 = 1.02/1.055-1 Inflation is .03318 decreasing r1=5.9% r1=6.6% Inflation = 1+.02/1+.059-1 Inflation = 1+.02/1+.066-1 = 1.02/1.059-1 = 1.02/1.066-1 Inflation is .03683 decreasing Inflation is .04315 decreasing 3.68% 4.32% r1=7.4% = Inflation = 1+.02/1+.074-1 = 1.02/1.074-1 Inflation is .0503 decreasing 5.03%
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