Steve and Amanda meet with Reed, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 7 percent. As it turns out, the inflation rate is 3 percent over the term of the loan.
a. What was the expected real interest rate?
b. What was the actual real interest rate?
c. Who benefitted and who lost because of the unexpected inflation?

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The Answer of Steve and Amanda meet with Reed, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 7 percent. As it turns out, the inflation rate is 3 percent over the term of the loan.
a. What was the expected real interest rate?
b. What was the actual real interest rate?
c. Who benefitted and who lost because of the unexpected inflation?

Steve and Amanda Meet with Reed, the Banker, to Work