Mark buys a one-year German government bond (called a bund)for $400.He receives principal and interest totalling $436 one year later.During the year the CPI rose from 150 to 162,but he had thought the CPI would be at 159 by the end of the year.Mark had expected the real interest rate to be ________,but it actually turned out to be ________.

Question

Quizplus · Accepted Answer

Mark expected the CPI to rise to 159, so he expected an inflation rate of (159-150)/150 = 6%. The nominal interest rate was (436-400)/400 = 9%. He expected the real interest rate to be 9% - 6% = 3%. The actual inflation rate was (162-150)/150 = 8%, so the actual real interest rate was 9% - 8% = 1%.

Mark Buys a One-Year German Government Bond (Called a Bund)for