When solving for future value, if a problem presents you with and inflation rate and the...
When solving for future value, if a problem presents you with and inflation rate and the expected rate of return, is it correct to combine the rates such as (inflation 2%, expected return 6%) when solving for FV in excel, using 8% for the rate? I am unclear how inflation affects the rate of return.
Homework Answers
Interest rates (rate of return) comprise of two components viz. (1) Real interest rate and (2) Inflation rate. If both are combined together, the rate is referred to as 'Nominal interest rate'. Nature of the rate specified should be ascertained from the context.
When solving for future value, we have to ascertain whether the rate of return specified is the nominal rate or the real rate. If it is nominal rate, inflation rate shall not be added to it. If the rate given is real interest rate, inflation rate should be added to it and the combined rate should be used for calculating future value.
In the given example, if the expected return of 8% is the nominal rate, it contains the inflation factor which shall not be added again. If the rate of return of 8% is real interest rate, inflation rate of 2% should be added and the rate to be used shall be 10%.
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When solving for future value, if a problem presents you with
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Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
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Please include all the details and how to solve
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6.
7.
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6.
7.
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