Let: (1 ) Pt be the price of one unit of a market basket of goods (i.e., a composite commodity) in year t; (2 ) Pet+1 be the expected price of one unit of a market basket of goods in year t + 1; (3 ) ?et+1 be the expected rate of inflation between period t and t + 1; and (4 ) it be the one-year nominal interest rate. Suppose an individual borrows the equivalent of one unit of a composite
commodity today. Given this information, which of the following expressions represents (i.e., is equal to) the amount of the composite commodity one must repay in one year?
A) (1 + it)(Pet+1)/(Pt)
B) (1 + ?et+1)/(1 + it)
C) {(1 + ?et+1)/(1 + it)} - 1
D) {(1 + it)(Pt)/(Pet+1)} - 1
E) none of the above
A
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Assume that the U.S. interest rate is 5%, the European interest rate is 2%, and the future expected exchange rate in one year is $1.224. If the spot rate is $1.24, then the expected dollar return on euro deposits is:
a. 4% b. 7.1% c. 0.71% d. 0.129%
In the simple Keynesian model, total savings equals
a. total investment minus the budget deficit. b. total planned and unplanned investment. c. planned investment. d. planned investment plus the budget deficit. e. none of the above.