Compute ex-ante and ex-post real rate of interest between

Reference no: EM13396205

In this problem we are going to calculate real interest rates, both ex-post and ex-ante. The data you need for this problem are given in the links below:

a. Calculate the ex-ante and ex-post real rate of interest between June 2008 and June 2009 (note that June 2009 is the last month of the Great recession - the official recovery, began in July of 2009). Why are these real rates so different? Again, please show all work.

b. We know that most decisions are in part, based on expectations of the future. Suppose we have two people who are trying to decide whether to consume today (assume it is currently June 2008) or save for the future and consume one year later, in June 2009. One person, let's call him Joe, is basing their decision on the ex-ante real rate of interest like most of us do. The other person who has a crystal ball, we'll call her Crystal, can see exactly what the actual rate of inflation is going to be and thus, has perfect foresight and bases their decision on the ex-post real rate. Given the difference in the ex-ante and ex-post real rates above, who would be more likely to save and who would be more likely to spend? Explain in detail and feel free to use the shopping cart example we used in lecture.

c. Given your response in part b) above, is the behavior of either Joe or Crystal consistent with the 'evils' of deflation? Why or why not. Explain.

Reference no: EM13396205

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