Find the precise expected real rate using the cpi

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Reference no: EM13236742

Mikey cuts hair to pay for his tuition for college. Unfortunately, the cost of a haircut in his town hasn't risen in years, and neither has his hourly wage. To make matters worse, the cover charge at his favourite club, Stages, keeps rising. He asks you to lend him $600, promising to repay you with interest at the end of one year. You try to convince him to stay home and do his work, but he doesn't waiver. You decide to charge Mikey 5% interest, the same as the fixed rate on your student loan. At the end of the year, he repays you principal plus interest in full.

Find the precise expected real rate using the CPI figures from parts (a) and (b) (correct to 2 decimal places ie. 4.75%). What would be the expected real interest rate if you never considered that prices could change during the year?

Reference no: EM13236742

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