Inflation expectations, Business Economics

Assignment Help:
An individual holds B_0 dollars in a saving accountant at t=0 and earns continuously compounded interest at a nominal rate r. Therefore, the nominal value of his savings at time t is given B_t=e^rt. To find out the real value of his savings at each moment in time, we must divide by the price level. Assume the price level follows a geometric Brownian motion:
dP=pPdt+sPdz
where p is the expected rate of inflation and s is its volatility parameter
Let B_t/P_t be the real value of savings. Derive the law of motion for b using Ito’s Lemma. (Hint: you should obtain a law db=f (b)dt+ g(b)dz, where f and g are functions og just b for you to derive)
What is the individual’s expected real rate of return on his savings?
Calculate the expected real value of the individual’s savings at time t from the point of view of t=0, i.e E_¦(0@)[b_t]

Related Discussions:- Inflation expectations

Labour force, how does occupation affect the size of labour force

how does occupation affect the size of labour force

Calculate present discounted value of the annual cash flow, (present value)...

(present value) Suppose an entrepreneur considers to invest in a project. It needs a cash investment $I at year t = 0. If she/he invests, the project will generate an annual cash

Balance of payments, BALANCE OF PAYMENTS: The record of all transactio...

BALANCE OF PAYMENTS: The record of all transactions (trade and financial) of the residents of one country with the rest of the world is Balance of Payments (BoP). The directio

What is foreign debt management, What is Foreign Debt Management? Debt...

What is Foreign Debt Management? Debt management considers as to the arrangements made to: • Protected the suitable amount of borrowing to deliver growth • Ignore excess

What is profitability index, The problem with the above method crops up whe...

The problem with the above method crops up when we want to compare two or more dissimilar (different sized) projects. A mega project may yield a very large NPV sum, whereas a mini

Internal audit, Explain the essential distinction among the stages of growt...

Explain the essential distinction among the stages of growth theory of development, the theory of international-dependence in both its neo-marxist and false paradigm conceptualizat

Calculate the standard error, The Wallpaper Shop, Inc., is a rapidly growin...

The Wallpaper Shop, Inc., is a rapidly growing chain of wallpaper shops that caters to the do-it-yourself home remodeling market. During the past year, 15 stores were operated in s

What are the assumptions of dependency theory, What are the assumptions of ...

What are the assumptions of dependency theory? The assumptions of dependency theory: Dependency theory extends Marx is theory of surplus value to international relationship

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd