Assume That a Series of Inflation Rates Is 1 Percent

question 6

Essay

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?

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Definitions:

Intrinsically Motivated

Being driven to act or participate in an activity for its own sake and personal reward.

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Being driven to perform or engage in an activity because of external rewards or pressures rather than for the sake of the activity itself.

Academic Motivations

The internal or external drives that encourage students to pursue and achieve their educational goals.

Study

The act of devoting time and attention to acquiring knowledge on an academic subject, especially by means of books.