Currently, the general price level is 150.00 and people expect it to increase to 156.00 next year. Therefore, the expected rate of inflation equals 4.00 percent. Moreover, there is a one-year bond that promises to pay $107,000.00 next year and is selling for $100,000.00 in the bond market today. So, the nominal interest rate equals 7.00 percent, and the ex-ante real interest rate on this bond equals 3.00 percent. Because of some news, people revise their expectations of the future price level to 159.00. According to the Fisher Effect, the price of the bond today will change to _____ dollars.
Currently, the general price level is 150.00 and people expect it to increase to 156.00 next year. Therefore, the expected rate of inflation equals 4.00 percent. Moreover, there is a one-year bond that promises to pay $107,000.00 next year and is selling for $100,000.00 in the bond market today. So, the nominal interest rate equals 7.00 percent, and the ex-ante real interest rate on this bond equals 3.00 percent. Because of some news, people revise their expectations of the future price level to 159.00. According to the Fisher Effect, the price of the bond today will change to _____ dollars.
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter9: An Introduction To Basic Macroeconomic Markets
Section: Chapter Questions
Problem 9CQ
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