The expected real interest rate is the rate which people use in making decisions about the future. It is the difference between the nominal interest rate and the expected inflation rate, not the actual inflation rate. How does expected inflation over the coming year compare with actual inflation over the past year? Plot the inflation rate since 1978 based on the percent change from a year ago of the U.S consumer price index (FRED code: CPIAUCSL). Add this figure as a second line to the expected inflation rate from the University of Michigan survey (FRED code: MICH).Is expected inflation always in line with actual inflation? Which is more stable?
Answer to relevant QuestionsPlot the expected real interest rate since 1979 by subtracting the Michigan survey inflation measure (FRED code: MICH) from the three-month Treasury bill rate (FRED code: TB3MS). Plot as a second line the ex post or realized ...Explain how liquidity problems can be an important source of systemic risk in the financial system.Mortgages increase the risk faced by homeowners.a. Explain how.b. What happens to the homeowner’s risk as the down payment on the house rises from 10 percent to 50 percent.Plot the percentage change from a year earlier of the value of the S&P 500 stock index (FRED code: SP500). Visually, has the risk of the S&P 500 index changed over time?Suppose you purchase a 3-year, 5-percent coupon bond at par and hold it for two years. During that time, the interest rate falls to 4 percent. Calculate your annual holding period return.
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