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Zane Parelli currently has $100 that he can spend today on polo shirts costing $25 each. Alternatively, he could invest $100 in a risk free U.S. treasury security that is expected to earn a 9% nominal rate of interest. The consensus forecast of leading economist is a 5% rate of inflation over the coming year.
a. How many polo shirts can Zane purchase today?
b. How much money will Zane have at the end of 1year if he forgoes purchasing the polo shirts today?
c. How much would you expect the polo shirts to cost at the end of 1 year in light of the expected inflation?
d. Use your findings in part b and c to determine how many polo shirts (fractions are okay) Zane can purchase at the end of 1year.In percentage terms, how many more or fewer polo shirts can Zane buy at the end of 1year?
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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