Real and nominal rates interest Zane Perelli currently has $108 that he can spend today on polo shirts costing $27 each. Alternatively, he could invest the $108 in a risk-free U.S. Treasury security that is expected to earn a 13% nominal rate of interest. The consensus forecast of leading economists is a 4% rate of inflation over the coming year. a. How many polo shirts can Zane purchase today? b. How much money will Zane have at the end of 1 year if he forgoes purchasing the polo shirts today? (Ignore taxes.) c. How much would you expect the polo shirts to cost at the end of 1 year in light of the expected inflation? d. Use your findings in parts b and c to determine how many polo shirts (fractions are OK) Zane can purchase at the end of 1 year. In percentage terms, how many more or fewer polo shirts can Zane buy at the end of 1 year? e. What is Zane's real rate of return over the year? How is it related to the percentage change in Zane's buying power found in part d? Explain. Click the icon to see the Worked Solution (Formula Solution). a. The number of polo shirts Zane can purchase today is 4 shirts. (Round to the nearest whole number.) b. The amount of money Zane will have at the end of 1 year if he forgoes purchasing the polo shirts today is $122.04. (Round to the nearest cent.) c. The expected price of the polo shirts at the end of 1 year in light of the expected inflation is $28.08. (Round to the nearest cent.) d. Using your findings in parts b and c, the number of polo shirts Zane can purchase at the end of 1 year is 4.3462 shirts. (Round to four decimal places.) In percentage terms, the more or fewer polo shirts Zane can buy at the end of 1 year is 9%. (Round to the nearest whole percent.) e. Zane's real rate of return over the year is 9%. (Round to the nearest whole percent.) How is the real rate of return related to the percentage change in Zane's buying power found in part d? (Select from the drop-down menu.) The change in the number of shirts that can be purchased is equal to the real rate of return since the portion of the nominal return for expected inflation is used to maintain the ability to purchase the same number of shirts. Review Only