Why the actual ex-post real interest rate is different

Assignment Help Econometrics

Reference no: EM13202184

Suppose that David has $1000. In the beginning of a year he decided to put his money in a saving account with 5% interest rate per year. The CPI was 150 in the beginning of that year. He expected that the CPI would be 153 in the beginning of the next year. However, it turned out that the CPI was 156 in the beginning of the next year.
A) Calculate the inflation rate, the actual ex-post real interest rate, and the expected real interest rate.
B) Why the actual ex-post real interest rate is different from the expected interest rate? Explain what features of the economy can generate this gap.
C) Suppose David had another alternative. There was a one-year government bond at the beginning of the first year for $1,000. He would receive principal plus interest totaling $1,020 at the beginning of the next year.
According to his expectation, did David decide rationally on putting his money in the saving account instead of buying the bond?
What would have David decided if he could have known the true CPI in the beginning of the next year? Was he still willing to choose to put his money in the saving account?

Reference no: EM13202184

Questions Cloud

What dimensions will give the largest printed area : A poster is to have an area of 250 in2 with 3 inch margins at the bottom and sides and a 7 inch margin at the top. What dimensions will give the largest printed area? (Give your answers correct to one decimal place.)

Find the equation of the sphere : Find the equation of the sphere if one of its diameters has endpoints (-8, 6, 10) and (-5, 12, 19) which has been normalized so that the coefficient of x^2 is 1.

What are the three cards : There is a diamond on the right of a diamond. What are the three cards. Please, show wok and solution.

What dimensions will give the largest printed area : A poster is to have an area of 150 in2 with 1 inch margins at the bottom and sides and a 5 inch margin at the top. What dimensions will give the largest printed area?

Why the actual ex-post real interest rate is different : Suppose that David has $1000. In the beginning of a year he decided to put his money in a saving account with 5% interest rate per year. The CPI was 150 in the beginning of that year. He expected that the CPI would be 153 in the beginning of the n..

What do pablo casals-john rock and grandma moses : What do Pablo Casals, John Rock, and Grandma Moses have in common?

What is the price and quantity : An ice cream company finds that at a price of $5.00 demand is 6300 units. For every $0.15 decrease in price, demand increases by 135 units. Find the price and quantity sold that maximizes revenue. What is the price and quantity?

What factors influence the level of investment : In turn, what factors influence the level of investment what sort of government policies or programs are capable of stabilizing employment and dampening the business cycle How do these policies work

How far apart are towns b and c : town A is 60 km due east of town B. Town C is 144 km from town A at a bearing (from A) of N57degreesE. How far apart are towns B and C?

User Account

All Pages