Suppose the nominal interest rate on a one-year car loan is 8% and the inflation rate is expected to be 3% over the next year. Based on this information, we know:
A) the ex ante real interest rate is 5%.
B) the lender benefits more than the borrower because of the difference in the nominal versus real interest rates.
C) at the end of the year, the borrower pays only 5% in nominal interest.
D) the ex post real interest rate 11%.

Question

Quizplus · Accepted Answer

The ex ante real interest rate is calculated by subtracting the expected inflation rate from the nominal interest rate. In this case, the ex ante real interest rate is 5% (8% - 3%). The lender does benefit from the difference between the nominal and real interest rates, but this is not relevant to the question. The borrower will still have to pay 8% nominal interest at the end of the year. The ex post real interest rate cannot be calculated without knowing the actual inflation rate at the end of the year.

Suppose the Nominal Interest Rate on a One-Year Car Loan