By Marks buys a one-year German government bond (called a bund)for $400.He receives principal and interest totaling $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.By Marks had expected the real interest rate to be ________,but it actually turned out to be ________.

Question

Quizplus · Accepted Answer

The expected real interest rate is calculated based on the expected inflation rate, while the actual real interest rate is based on the actual inflation rate. Expected inflation was from 150 to 159, a 6% increase (9/150), and actual inflation was from 150 to 162, an 8% increase (12/150). By Marks received a 9% nominal return ($36 on a $400 investment). The expected real interest rate = nominal rate - expected inflation rate = 9% - 6% = 3%. The actual real interest rate = nominal rate - actual inflation rate = 9% - 8% = 1%.

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