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 economic systems, What are economic systems? An economic syst...

What are economic systems? An economic system is the system of organisations utilized by a society to solve the economic difficulty of what how and for whom to make. There are

Theories of maslow and hertzberg to categorize project team, How can Maslow...

How can Maslow and Hertzberg’s Herzberg theories of inspiration assist you to categorize your project team and the way work is assigned? We must suppose that working in an IS p

Eco/561, purely competitive firms increase total revenue by

purely competitive firms increase total revenue by

User affects of involvement and support for is project, Explain the user af...

Explain the user affects of involvement and support for IS project. User involvement and support: The commitment of employers and user management to the project can’t be

How does social capital influence development, How does social capital infl...

How does social capital influence development? Problem: Low social capital leads to potential conflicts and high transaction costs which hinder growth. Several LDCs (Less Deve

Own price elasticity of demand for a commodity, a) Explain why each of the ...

a) Explain why each of the following factors may influence the own price elasticity of demand for a commodity. (i) Consumer preferences, that is, whether consumers regard the comm

Is population growth a problem, Is population growth a problem? Quick p...

Is population growth a problem? Quick population growth is a main cause of poverty and arises where population growth go beyond the rate of economic growth. Standards of liv

Linea programming, use of linear programming in decision making

use of linear programming in decision making

Opportunity cost and sunk cost, as mention above, the physical demand for g...

as mention above, the physical demand for gold rises in india during late summer and the beginning of fall.what situation occurs at the end of the year?

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