Real and nominal rates interest zane perelli currently has $108 that he can spend today on socks costing $ 2.70 each. alternatively, he could invest the $108 in a risk-free u. s. treasury security that is expected to earn a 11% nominal rate of interest. the consensus forecast of leading economists is a 5% rate of inflation over the coming year.
a. how many socks can zane purchase today?
b. how much money will zane have at the end of 1 year if he forgoes purchasing the socks today and invests his money instead? (ignore taxes.)
c. how much would you expect the socks to cost at the end of 1 year in light of the expected inflation?
d. use your findings in parts b and c to determine how many socks (fractions are ok) zane can purchase at the end of 1 year. in percentage terms, how many more or fewer socks can zane buy at the end of 1 year?
e. 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.
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