Reference no: EM13840234
Assume that the inflation rates in 2010, 2011, and 2012 were 1%, 2%, and 3% respectively.
During the same periods, nominal interest rates were 5%, 5%, and 6%, respectively.
(a) What are the ex-post real interest rates in 2010, 2011, and 2012?
(b) Suppose expected inflation rate in 2011 is the ex-post inflation rate in 2010, and expected inflation rate in 2012 is the ex-post inflation rate in period 2011. What are the ex-ante real interest rates in 2011 and 2012?
(c) If someone lends in 2011, based on the ex-ante inflation expectation in part (b), is he better or worse off when the loan is repaid? Explain why.
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