Inflation expectations, Business Economics

An individual holds B_0 dollars in a saving accountant at t=0 and earns continuously compounded interest at a nominal rate r. Therefore, the nominal value of his savings at time t is given B_t=e^rt. To find out the real value of his savings at each moment in time, we must divide by the price level. Assume the price level follows a geometric Brownian motion:
dP=pPdt+sPdz
where p is the expected rate of inflation and s is its volatility parameter
Let B_t/P_t be the real value of savings. Derive the law of motion for b using Ito’s Lemma. (Hint: you should obtain a law db=f (b)dt+ g(b)dz, where f and g are functions og just b for you to derive)
What is the individual’s expected real rate of return on his savings?
Calculate the expected real value of the individual’s savings at time t from the point of view of t=0, i.e E_¦(0@)[b_t]
Posted Date: 3/10/2013 9:23:42 PM | Location : United States







Related Discussions:- Inflation expectations, Assignment Help, Ask Question on Inflation expectations, Get Answer, Expert's Help, Inflation expectations Discussions

Write discussion on Inflation expectations
Your posts are moderated
Related Questions
what is increaase libralisation?


What are the restrictions of Lewis? The restrictions of Lewis: • Assumes complete employment in urban regions. Evidence recommend otherwise • Raised profits may be inves

If the Government decreases the interest rates on capital goods such as new plant and equipment and building. Investment also include spending on working capital such as stocks of

In AS/AD model monetary polices is seen to working primly through its effect on interest rate. There are some example to understand to interest policy impact on exchange rate an

#question the importance of managerial economics..

What are the predictions of Lewis? For Lewis, Harrod Domar is right to emphasise the task of savings and investment although structural change and a new industrial sector are

Explain the user affects of involvement and support for IS project. User involvement and support: The commitment of employers and user management to the project can’t be

(a) Using the basic concept of price elasticity of demand for his product, describe how the producer may raise his total revenue. (b) With reference to an initial set of marke

Distribution of benefits for transferring drivers to transit during a congested morning commute A residential suburb has N = 30,000 commuters who drive alone to jobs in a cen