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Real and nominal rates interest Zane Perelli currently has $120 that he can spend today on polo shirts costing $30 each. Alliteratively, he could invest
Real and nominal rates interest Zane Perelli currently has $120 that he can spend today on polo shirts costing $30 each. Alliteratively, he could invest the S120 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 6% rate of inflation over the coming year. How many polo shirts can Zane purchase today? How much money will Zane have at the end of 1 year if he forgoes purchasing the polo shirts today? (Ignore taxes.) How much would you expect the polo shirts to cost at the end of 1 year in light of the expected inflation? 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? 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
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