Problem Set 3 Assignment

Problem Set 3 Assignment - Economics 330 Money and Banking...

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Economics 330 – Money and Banking Spring 2010 Dr. Neri Problem Set 3 – Due within the first 5 minutes of lecture on Wednesday October 13, 2010. Late submissions and E-mail submissions will not be accepted. You must show your calculations. Question No. 1 Assume the Expectations Theory is correct. This question uses the notation presented in class for the Expectations Theory and listed on the PowerPoint lecture slides. Remember t is today (0), the beginning of year one, t+1 is (1), one-year from now at the beginning of year 2, etc. Suppose I know the real interest rate on a one-year bond starting now is 2% (r 1,t = 2%) and inflation today is expected to be 2% ( 1 2 % e t ). I expect r 1, t+1 = 2% and 1 1 3 % e t and r 1, t+2 = 2% and 1 2 4 % e t . This says the real interest rate on a one-year bond is currently 2% and it is expected to remain constant over the following two years (years 2 and 3). The expected rate of inflation in year one is 2% and it is expected to increase to 3% and 4% over the following two years, respectively.
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This note was uploaded on 11/30/2010 for the course ECON 0101 taught by Professor Johnneri during the Spring '08 term at Maryland.

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