Q1-You expect the inflation rate to be 8% p.a. You decide to invest $100 today and an amount of equal purchasing power in one year. The rate of return is an EAR of 12%. How much will you have in two years?

1. Do the calculation in nominal dollars. In other words, do all the calculations in actual (nominal) dollars. Do not work in real dollars.

2. Also do this calculation in real dollars, only converting to nominal dollars as the last step. In other words, do all the calculations in real dollars (muffins). When you get the number of real dollars at the end after two years, only then convert to actual (nominal) dollars.

You must read this question very carefully, especially the bold and slanted. It is very easy to get tripped up