Consider the plight of Bill, a taxi driver who invests $1,000 dollars in his
business.
a. Suppose that Bill uses the $1,000 to buy a taxicab, which he uses for a year. On the last day of that year, the taxicab will earn Bill $300. Suppose further that at the end of the year, the taxicab is worth $800. What is the nominal rate of return on Bill's investment?
b. Suppose that expected inflation is 4 percent. What is (approximately) the real rate of return on Bill's investment?
c. Suppose that Bill had rented the cab for a year instead. Assuming that Bill paid $1,000 for the lease, what is the nominal rate of return on his investment now?