Suppose You Buy an Inflation-Indexed Bond That Will Adjust with Inflation

question 28

Essay

Suppose you buy an inflation-indexed bond that will adjust with inflation and thus pay you $2,500 in real (inflation- adjusted) terms each year for the next five years, plus your real principal of $100,000 at the end of the fifth year.The nominal interest rate is 4 percent and the expected inflation rate is 1 percent.What is the present value of the bond? Show your work.

Identify the consequences of price ceilings, such as shortages, on market efficiency and the welfare of consumers and producers.

Recognize the role of price floors in creating surpluses and their effects on market dynamics.

Explain the rationale behind government policies of price control for political or social objectives.

Assess the formation and impact of black markets as a response to binding price controls.

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Definitions:

Imprinting

Learning to make a particular response to only one type of animal or object.

Sexual Selection

Changes in males and females, often due to male competition and female selectivity, leading to increased fitness.

Natural Selection

Mechanism of evolutionary change caused by environmental selection of organisms most fit to reproduce; results in adaptation to the environment.

Fixed-Action Pattern

A fixed-action pattern is a sequence of unlearned, innate behaviors that is triggered by a specific stimulus and is carried to completion once started.