Assignment Question I can't find an answer too:

Assume that a series of inflation rates is 1 percent, 2 percent, and 4 percent, while nominal interest rates in the same three periods are 5 percent, 5 percent, and 6 percent, respectively.

a.What are the ex post real interest rates in the same three periods?

b.If the expected inflation rate in each period is the realized inflation rate in the previous period, what are the ex ante real interest rates in periods two and three?

c.If someone makes a loan in period two based on the ex ante inflation expectation in part b, will he or she be pleasantly or unpleasantly surprised?

To answer these questions, we need to understand the concepts of nominal interest rates, inflation rates, and real interest rates.

a. Ex post real interest rate is calculated by subtracting the inflation rate from the nominal interest rate.
For the first period:
Nominal interest rate = 5%
Inflation rate = 1%
Ex post real interest rate = 5% - 1% = 4%

For the second period:
Nominal interest rate = 5%
Inflation rate = 2%
Ex post real interest rate = 5% - 2% = 3%

For the third period:
Nominal interest rate = 6%
Inflation rate = 4%
Ex post real interest rate = 6% - 4% = 2%

b. Ex ante real interest rate takes into account the expected inflation rate. If the expected inflation rate in each period is the realized inflation rate in the previous period, we can calculate the ex ante real interest rates.

Ex ante real interest rate in period two:
Nominal interest rate = 5%
Expected inflation rate (realized inflation rate from period one) = 1%
Ex ante real interest rate = 5% - 1% = 4%

Ex ante real interest rate in period three:
Nominal interest rate = 6%
Expected inflation rate (realized inflation rate from period two) = 2%
Ex ante real interest rate = 6% - 2% = 4%

c. To determine if the person making a loan in period two will be pleasantly or unpleasantly surprised, we compare the ex ante real interest rate with the ex post real interest rate.
In period two:
Ex ante real interest rate = 4%
Ex post real interest rate = 3%

Since the ex ante real interest rate (4%) is greater than the ex post real interest rate (3%), the person making the loan will be pleasantly surprised. They will be receiving a higher real return on their loan than they initially anticipated.

a. The ex post real interest rate is calculated by subtracting the inflation rate from the nominal interest rate.

In period one: Ex post real interest rate = Nominal interest rate - Inflation rate = 5% - 1% = 4%
In period two: Ex post real interest rate = 5% - 2% = 3%
In period three: Ex post real interest rate = 6% - 4% = 2%

b. The ex ante real interest rate is calculated using the expected inflation rate.

In period two: Ex ante real interest rate = Nominal interest rate - Expected inflation rate = 5% - 1% = 4%
In period three: Ex ante real interest rate = 5% - 2% = 3%

c. To determine if the person making the loan will be pleasantly or unpleasantly surprised in period two, we compare the realized inflation rate with the expected inflation rate.

In period two, the expected inflation rate is 1%, while the realized inflation rate is 2%. Since the realized inflation rate is higher than the expected inflation rate, the person making the loan will be unpleasantly surprised.