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:

Median

The middle value in a dataset, where half of the numbers are below and half above this point when the data is arranged in ascending order.

Midterm Exam Scores

The results or grades obtained by students on examinations conducted halfway through an academic term or semester.

Stemplot

A simple graphical method for displaying quantitative data, particularly useful for small datasets, showing data distribution and skewness.

Interquartile Range

A measure of variability, calculated by subtracting the first quartile from the third quartile, indicating the spread of the middle 50% of a dataset.