DSE 2012 Q51

[jhimli]

hi, can anyone please show the working for DSE2012 Q51? thanks in advance.

[duck]

Hi Jhimli.. :)

Its given:
Wt = Pt_eF(ut,At)
And  Pt = (1 + μ)Wt
⇒ Pt/Pt_e = F*(1+μ)........... (I)

You're also given the equations for Actual interest rate and expected inflation rate.
From that you'll get:
(1+Πt) = (Pt/Pt_e)*(1+Πt_e).......... (II)


Just solve (I) and (II) to get the relationship between expected inflation and actual inflation rate.