You have $100,000 and the basket of goods and services that Statistics Canada uses to track inflation (the basket) currently costs $100. You have the opportunity to invest your $100,000 and earn a return on your funds of 19%, however you expect the basket to cost $116 in one year.
a. How many baskets can you buy today if you don’t do the investing?
b. If you invest, how much money will you have in one year?
c. What is the expected inflation rate over the coming year?
d. How many baskets do you expect to buy in one year if you invest? By how much do you expect your purchasing power to change if you invest? What do you expect to earn as the real rate of return by investing?
e. Relate the nominal interest rate, real interest rate, and inflation rate to each other. Do these results match what you found in the previous parts of this question?