Question

Over the past five years, you have recorded the inflation rate to be 3 percent, 4...

Over the past five years, you have recorded the inflation rate to be 3 percent, 4 percent, 3 percent, 4 percent, and 3 percent, respectively. According to rational expectations theory, what would market participants expect inflation to be next year, and why?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer: expected inflation is 4%.

The theory indicates a model as below:

No.1) Available information – there are information of inflation rates of last 5 years.

No.2) Past experiences – (a) if a year has decreasing inflation rate, the following year would have increasing inflation rate. (b) The rates of inflation are just between two numbers 3% and 4%.

No.3) Rational judgment: Based on the past experiences (a) the last inflation (3%) is lower than earlier (4%), therefore the next year’s inflation would be higher, (b) since it ends up with 3%, the next rate would be 4%.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Inflation is expected to be 3 percent over the next year. You desire an annual real...
Inflation is expected to be 3 percent over the next year. You desire an annual real rate of return of 2.5 percent on your investments. What market rate of interest would have to be offered on a one-year Treasury security for you to consider making an investment? 1.5 percent 5.5 percent 4.5 percent 0.5 percent None of the above
You want to have $300,000 in real terms 7 years from now. You expect inflation over...
You want to have $300,000 in real terms 7 years from now. You expect inflation over that time period to be 4% per year. Your investments earn 7% APR (nominal) compounded annually. Based on your expectations, you construct a growing nominal annuity to meet your investment target. What is the nominal cash-flow you would have to deposit in year 5 if inflation turns out to what you expected?
Over the past four years, a stock produced returns of 6 percent, 8 percent, 19 percent,...
Over the past four years, a stock produced returns of 6 percent, 8 percent, 19 percent, and 2 percent, respectively. Based on these four years, what range of returns would you expect to see 95 percent of the time?
You’ve observed the following returns on Barnett Corporation’s stock over the past five years: –26.4 percent,...
You’ve observed the following returns on Barnett Corporation’s stock over the past five years: –26.4 percent, 14.6 percent, 32.2 percent, 2.8 percent, and 21.8 percent. The average inflation rate over this period was 3.28 percent and the average T-bill rate over the period was 4.3 percent. What was the average real risk-free rate over this time period?
If the expected path of 1-year interest rates over the next five years is 1%, 2%,...
If the expected path of 1-year interest rates over the next five years is 1%, 2%, 3%, 4%, and 5%, the expectations theory predicts which maturity of bond with the highest interest rate today? Assume that liquidity premium for the bonds of 1 to 5 years to maturity is 0%, 0.1%, 0.13% 0.2%, and 0.3% respectively, calculate YTM of 1 to 5 year bonds.
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 4 percent,...
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 4 percent, –15 percent, 26 percent, 19 percent, and 14 percent.    What was the arithmetic average return on the company's stock over this five-year period?     What was the variance of the company's returns over this period?     What was the standard deviation of the company’s returns over this period?
Over the past five years, a stock produced returns of 11 percent, 14 percent, 4 percent,...
Over the past five years, a stock produced returns of 11 percent, 14 percent, 4 percent, -9 percent, and 5 percent. What is the probability that an investor in this stock will not lose more than 10 percent in any one given year? - Greater than .5 but less than 1.0 percent. - Greater than 1 percent but less than 2.5 percent. - Greater than 2.5 percent but less than 16 percent. - Greater than 84 percent but less than...
Over the past five years, a stock returned 5.31 percent, 0.81 percent, 29.59 percent, 3.63 percent,...
Over the past five years, a stock returned 5.31 percent, 0.81 percent, 29.59 percent, 3.63 percent, and 16.15 percent, respectively. What is the variance (as a decimal fraction) of these returns? Carry intermediate calculations to six decimals. Answer to four decimals. Your answer should look something like 0.0123, or 0.0024
Suppose the underlying real interest rate is 4%. People expect an inflation rate of 2.3% over...
Suppose the underlying real interest rate is 4%. People expect an inflation rate of 2.3% over the next year. a) At what rate will banks set their interest rates? b) Suppose inflation turns out to be 3%. Using your answer from (a), what does the real interest rate turn out to be? c) Explain why unexpectedly high inflation helps borrowers
Over the past year (from 1 year ago to today), the inflation rate was 5.26 percent,...
Over the past year (from 1 year ago to today), the inflation rate was 5.26 percent, the risk-free rate was 7.86 percent, and the real rate of return for a bond was 9.38 percent. The bond was priced at 1,192.22 dollars one year ago and 1,212.7 dollars two years ago, pays annual coupons of 50.99 dollars, and just made a coupon payment. What is the price of the bond today?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT