Real and nominal rates interest Zane Perelli currently has $120 that he can spend today on polo shirts costing $ 30 each. Alternatively, he could invest the $120 in a risk-free U.S. Treasury security that is expected to earn a 13% nominal rate of interest. The consensus forecast of leading economists is a 4% rate of inflation over the coming year.

Question

Real and nominal rates interest   Zane Perelli currently has ​$120 that he can spend today on polo shirts costing $ 30 each. ​ Alternatively, he could invest the ​$120 in a​ risk-free U.S. Treasury security that is expected to earn a  13​% nominal rate of interest.  The consensus forecast of leading economists is a 4​% rate of inflation over the coming year.
a.  How many polo shirts can Zane purchase​ today?
b.  How much money will Zane have at the end of 1 year if he forgoes purchasing the polo shirts​ today? ​ (Ignore taxes.)
c.  How much would you expect the polo shirts to cost at the end of 1 year in light of the expected​ inflation?
d.  Use your findings in parts b and c to determine how many polo shirts​ (fractions are​ OK) Zane can purchase at the end of 1 year.  In percentage​ terms, how many more or fewer polo shirts can Zane buy at the end of 1​ year?
e.  What is​ Zane's real rate of return over the​ year?  How is it related to the percentage change in​ Zane's buying power found in part d​?  Explain.