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^et ₊ ₁ be the expected price of one unit of a market basket of goods in year t + 1; (3) π^et ₊ ₁ 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 real interest rate (rt) ?

A) (1 + it) (P^et₊₁) / (Pt)
B) (1 + π^et₊₁) / (1 + it)
C) {(1 + π^et₊₁) / (1 + it) } - 1
D) {(1 + it) (Pt) / (P^et₊₁) } - 1
E) none of the above