Reference no: EM132343932

Assume that currently the nominal interest rate is 3% and lenders and borrowers expect the rate of price inflation for the next year to be 1%. Additionally, the price level today is P = 100. A lender lends $100,000 for a year to a borrower. When next year comes, the inflation rate actually turns out to be 3%. With the amount of money received from the borrower, the lender will be able to buy__units of goods and services next year. So the lender's real purchasing power actually changes by__percent over the next year as a result of lending. This actual rate of increase in the real purchasing power is called the ex-post real interest rate and is approximated by the difference between the nominal interest and the actual inflation rate next year.

If next year, the inflation rate turned out to be 5%, the lender's purchasing power would change by__percent.