2. Government Treasury bills are yielding 4.15%. Inflation is 2.75%. What is the real rate of return on this financial asset? A. 6.90% B. 7.01% C. 1.36% D. 1.40%

What is the present value of the following cash-flow stream if the interest rate is 4%? Year 1: $170; 2: $370; 3:$270

Find the external rate of return for the following cash flows using the modified rate of return. Assume that the investment rate is 12% per year and the borrowing rate is 8% per year. Year Net cash flow, S 0 1 2 3 4 S O a. 9.3% O b. 10.2% O c. 10.9% O d. 11.7% O e. 12.1% -28,400 10,000 10,000 10,000 -7,000 10,000 XX/XXX

6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on savings accounts is 11% per year, and both actual and expected inflation are equal to 6%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Time Period Nominal Interest Rate Expected Inflation Actual Inflation Expected Real Interest Rate Actual Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) Before increase in MS 11 6 6       Immediately after increase in MS 11 6  10     Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 6% to 10% per year. Complete the second row of the table by filling in the expected and actual real interest rates on savings accounts immediately after the increase in the money supply (MS). The unanticipated change in…