Suppose that country is experiencing heavy inflation

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a) Suppose that a country is experiencing heavy inflation. Its annual inflation rate stands at 45%, and its nominal interest rate is 62%. Find the real rate of return using both methods that we learned: the approximation, the exact formula.

(b) Suppose that the pure expectations theory of interest rates is correct. The interest rate on a three year bond is 7% annually. The interest rate on a 5 year bond is 7.5% annually. What interest rate do investors expect on two-year bonds in three years from now?

Reference no: EM131052240

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