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

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 e be the expected price of one unit of a market basket of goods in year t + 1; (3) u e 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 + u e ) /(1 + it) ]- 1.
B) [(1 + it) P e /Pt]- 1.
C) [(1 + u e ) /(1 + it) ]+1.
D) (1 + u e ) /(1 + it) .
E) (1 + it) Pt/ P e .