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

Why is debt management difficult in less developed countries, Why is debt m...

Why is debt management difficult in Less Developed Countries? One of the biggest challenges facing Less Developed Countries debt management is making sure $ interest payments c

How external trade promote economic development and growth, How can externa...

How can external trade promote economic development and growth? International trade permits increased specialisation than higher output permits economies of scale. • A big m

Importance of non profit organisations, (a) Show the importance of Non Pro...

(a) Show the importance of Non Profit Organisations in Small Island Economies. (b) Show the importance of Foreign Direct Investment in Small Island Economies. Comment on th

Explain the 3 different ways of calculating national income, QUESTION (...

QUESTION (a) Explain the 3 different ways of calculating national income. (b) Does the National Income figure accurately reflect the living standard of a population? Discuss

Define the implications of dependency problem, Define the implications of d...

Define the implications of dependency problem. Implications of dependency problem: To escape exploitation, underdeveloped countries should gain political, economic and so

How can less developed countries economies produced, How can less developed...

How can less developed countries economies produced by developing its primary sector as agriculture? Less developed countries economies cannot grow by developing its primary se

What are the major problems in measuring national income, What are the majo...

What are the major problems in measuring national income? The major problems in measuring national income: a. Unreliable statistics data collection is costly and the figu

Calculate potential gross income, (a)  Assume that Purchase Price is equal ...

(a)  Assume that Purchase Price is equal to initial Market Value (b) Your Market Rent starts at the indicated level and increases by this factor for all of Year 2 and for each y

Calculate the price - earnings ratio, Yanni works for Woolworths Limited (W...

Yanni works for Woolworths Limited (WOW) and owns 5,000 Woolworths shares that he received in lieu of a bonus five years ago. Woolworths has reported an NPAT of $1.294 billion and

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