Let: (1)Pt Be the Price of One Unit of a Market

question 18

Multiple Choice

Let: (1) Pt be the price of one unit of a market basket of goods (i.e.,a composite commodity) in year t; (2) P^et₊₁ be the expected price of one unit of a market basket of goods in year t + 1; (3) π^et₊₁ be the expected rate of inflation between period t and t + 1; and (4) it be the one-year nominal interest rate.Suppose an individual borrows the equivalent of one unit of a composite commodity today.Given this information,which of the following expressions represents (i.e.,is equal to) the amount of the composite commodity one must repay in one year?

• A)(1 + it)(P^et₊₁)/ (Pt)
• B)(1 + π^et₊₁)/ (1 + it)
• C){(1 + π^et₊₁)/ (1 + it)} - 1
• D){(1 + it)(Pt)/ (P^et₊₁)} - 1
• E) none of the above

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