In January of this year, Lorina opens an investment account that has a nominal interest rate of 3.8%. The consumer price index in January was 211.93 and is expected to go to 213.21 in a year. Suppose that the consumer price index actually turns out to be 209.75 in a year. Based on this information, answer the following questions.
(a) What is the expected rate of inflation over the year?
(b) What is Lorina's expected real interest rate?
(c) What is Lorina's actual real rate of interest?
Correct Answer:
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