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
1. How would you describe a market economy? 2. What distinguishes a market economy from a command economy? 3. Is there a role for government intervention in the Australian econ

QUESTION (a) Distinguish between monetary and fiscal policy, giving examples where appropriate. (b) Discuss how fiscal and monetary policies might be used by a government du

Compute the experience curve: Chuck Raverty, General Manager of Carey Builders, a Baltimoreconstruction company is considering bidding for a construction contract on the new

The reserve requirement is 20%. Assuming banks have no desire to hold excess reserves, calculate the money multiplier. Now assume the banks want to hold 20% of their reserves in ad

QUESTION (a) State whether the following statements are TRUE or FALSE. Clearly explain your answer. (i)The Keynes liquidity Preference theory stipulates that money demand is

Markets are often classified in terms of the nature of competition and collaboration they facilitate. In economic analysis, if the elements of competitions are “pure” then the mark

What is the difference between absolute and comparative advantage? Difference between absolute and comparative advantage: • Absolute advantage arises while a country or reg

1. A monopolist faces the industry demand Q=400-0.5 p and has constant marginal costs of 8, with no fixed costs. a) What is the monopoly price? What is the monopoly quantity?

The prevention of main swings in economic activity can be handled most simply by the household sector. Explain why?

Question The Borneo Shop imports and sells a popular Blue Ray DVD player. The following current information about the business is available:           Selling price per play