Let: (1)Pt be the price of one unit of a market basket of goods 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) (Pet+1) / (Pt)
B) (1 + πet+1) / (1 + it)
C){(1 + πet+1) / (1 + it)} - 1
D){(1 + it) (Pt) / (Pet+1)} - 1
E)none of the above

Question

Quizplus · Accepted Answer

The expression for the amount of the composite commodity one must repay in one year is (1 + it) (Pet+1) / (Pt), which is option A. This expression takes into account the change in the price of the market basket of goods (Pet+1) due to inflation (πet+1), and adjusts it by the interest rate (it) to calculate the total amount owed in one year.

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