Define the real interest rate

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1. Define the real interest rate,r. Why does it differ from the nominal interest rate, i, in the presence of inflation?

2. Why does the actual real interest rate, r, generally differ from the expected real interest rate, r^e? How does this relation depend on whether bonds prescribe the nominal or real interest rate?

3. Why does the real interest rate, not the nominal interest rate, have intertemporal-substitution effects on consumption and saving? Does the same result apply for intertemporal substitution of labor supply?

Reference no: EM131159776

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