From 1972 to 1974, the expected real interest rate on short-term bonds averaged about +2 percent, but the realized real interest rate averaged about −2 percent.The main reason for the difference was that
A)actual inflation was about 4 percentage points lower than expected inflation.
B)actual inflation was about 4 percentage points higher than expected inflation.
C)a monopoly cornered the market on short-term bonds.
D)nominal rate of interest was zero.

Question

Quizplus · Accepted Answer

The realized real interest rate averaging −2 percent implies that the nominal interest rate was lower than expected inflation, resulting in a negative real interest rate. Therefore, actual inflation was about 4 percentage points higher than expected inflation.

From 1972 to 1974, the Expected Real Interest Rate on Short-Term