Consider the case of an individual who lives for two periods, earns an income nominal of $ 10,000 in each of them, and has an initial and final amount of null assets

Economics Oct 05, 2020

Consider the case of an individual who lives for two periods, earns an income nominal of $ 10,000 in each of them, and has an initial and final amount of null assets. The nominal interest rate, R, of loans in dollars is 12% and the rate of expected inflation between the two periods is 8%.

Suppose the price level is 1 in the first period.

What is the price level in period 2 and what is the real value of the income from period 2?

Expert Solution

Expected inflation rate= 8%

Price level in period 2= 1+ 8%

= 1.8

Nominal income= 10000

Real value of the income from period 2= 10000/ 1.8

= $5555.56

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