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

What are the critics of advocates of world bank, What are the critics of ad...

What are the critics of advocates of World Bank in promotion of development? Critics of the World Bank argue: • A one-size-fits all strategy which does not take account

Explain how getting right price affected the market, Explain how getting ri...

Explain how getting right price affected the market for promoting development. Getting prices right implies: • Abolishing price controls as well as subsides on fundamentals.

Agriculture economics, A1. Given the following production function Level of...

A1. Given the following production function Level of fertilizer Level of maize 0 0 1 44.9 2 83.6 3 110.1 4 127.3 5 136.9 6 139.9 7 137.1 8 129.2 a) Calculate the APP, MPP and elas

Growth prospects of Thrust areas of Indian Exports, describe the avenues an...

describe the avenues and prospects of India''s leather and leather goods exports. what are the competitive advantages and disadvantages of leather and leather goods exports

Average, For the special case when firms are price takers, what is the rela...

For the special case when firms are price takers, what is the relation between total revenue, average revenue, marginal revenue and price?

Are patterns of trade a problem, Are patterns of trade a problem? Gene...

Are patterns of trade a problem? Generalising Less Developed Countries have a comparative advantage into primary products and employment intensive manufacturing; Developed Cou

Differentiate between absolute and relative poverty, QUESTION (a) Defin...

QUESTION (a) Define a public good and discuss how free riding might be a problem in the provision of a public good. (b) What is the rationale for government intervention in

Economic order quantity, A manufacturing company has determined from an an...

A manufacturing company has determined from an analysis of its accounting and production data for a certain part that : a. Its demand is 9000 units per annum and is uniform

Franchise, How can franchises ensure their products are appropriate for int...

How can franchises ensure their products are appropriate for international markets?

Business assignment, Ask question #. Explain why under fixed exchange rates...

Ask question #. Explain why under fixed exchange rates the monetary policy is not effective#

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