In country X, expected inflation per year is only 7%, but the expected variation in inflation is
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Question:
In country X, expected inflation per year is only 7%, but the expected variation in inflation is large. Suppose that inflation can vary within the range 3% to 19%.
a) What is the range of real rate of interest if the nominal interest rate in country X is 9%?
b) If probability of 19% inflation is 0.25 and 3% inflation is 0.75, what is the expected real rate of interest in country X?
c) What is the standard deviation of inflation and real interest rate?
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