Saturday

October 25, 2014

October 25, 2014

Posted by **Anonymous** on Saturday, October 4, 2008 at 9:58pm.

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?

- Macroeconomics -
**economyst**, Monday, October 6, 2008 at 9:02ama) real interest rate is nonminal rate less inflation.

b) ex ante means "before the facts" or "beforehand". So expected inflation in period 2 is inflation in period 1 = 1%.

c) the expected real interest in period 2 is interest less expected inflation = 5% - 1% = 4%. So, in period 2, the loaner got a 4% return rather than the ex post real rate of 3%. In year 3, the loaner gets a rate of 6% - 2% = 4% instead of the ex post real rate of 2%, I would say a pleasant surprise for the loaner in both years, (an unpleasant suprise for the loanee.)

**Answer this Question**

**Related Questions**

Macroeconomics - Assignment Question I can't find an answer too: Assume that a ...

macroeconomics - Assume that a series of inflation rates is 1 percent, 2 ...

Economics - If the velocity of circulation is constant, real GDP is growing at 3...

Finance 200 - The treasurer for Thornton Pipe and Steel Company wishes to use ...

Math - Go to Table 10-1 which is based on bonds paying 10 percent interest for ...

Accounting - Go to Table 10-1 which is based on bonds paying 10 percent interest...

Statistics - Mortgage Rates In 2001, the mean contract interest rate for a ...

macroeconomics - Suppose you were borrowing money to buy a car. Which of these ...

Math - A tax-exempt bond was recently issued at an annual 12 percent coupon rate...

Finance - A dealer in government securities currently holds $875 million in 10-...