Jonathan Harper currently has 1,000 that he can spend today on novelty yarn costing 20 a bundle.
Question:
Jonathan Harper currently has £1,000 that he can spend today on novelty yarn costing £20 a bundle. Alternatively, he could invest the £1,000 in a Bank of England bond that pays 6% nominal rate of interest. The inflation forecast for the coming year is 3%.
a. How many skeins of novelty yarn can Jonathan purchase today?
b. How much money will Jonathan have at the end of 1 year if he forgoes purchasing the skeins of yarn today and invests his money instead?
c. How much would you expect a skein of yarn to cost at the end of 1 year in light of the expected inflation?
d. If Jonathan invests in the bond and then uses the proceeds at the end of 1 year to buy yarn, how many skeins (fractions are OK) can he buy? Compare your answer to the number of skeins he can buy at the beginning of the period.
e. What is Jonathan’s real rate of return over the year? How is it related to the change in Jonathan’s buying power found in part d? Explain.
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a To calculate the number of skeins of novelty yarn Jonathan can purchase today we divide the amount of money he has 1000 by the cost of each bundle o...View the full answer
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