4. Inflation can redistribute wealth between borrowers and savers. Consider the following four cases. In each case, assume that when the loan was negotiated the nominal interest rate was set such that the lender would earn a 3% real return based on inflation expectations. Apply the Fisher effect to calculate the agreed upon nominal interest rate. Given that the actual inflation differs from the expected inflation rate, what was the actual real interest rate over the course of the loan? Who was harmed from the unexpected change? The borrower or the lender? Explain. Nominal Actual (Actual) real Who gets Expected inflation Expected real return interest rate inflation rate interest rate hurt? (En) (1) Borrower or lender 4% 3% 5% 6% 3% 4% -1% 3% 1% 3% 3% 3%
4. Inflation can redistribute wealth between borrowers and savers. Consider the following four cases. In each case, assume that when the loan was negotiated the nominal interest rate was set such that the lender would earn a 3% real return based on inflation expectations. Apply the Fisher effect to calculate the agreed upon nominal interest rate. Given that the actual inflation differs from the expected inflation rate, what was the actual real interest rate over the course of the loan? Who was harmed from the unexpected change? The borrower or the lender? Explain. Nominal Actual (Actual) real Who gets Expected inflation Expected real return interest rate inflation rate interest rate hurt? (En) (1) Borrower or lender 4% 3% 5% 6% 3% 4% -1% 3% 1% 3% 3% 3%
Chapter18: Introduction To Macroeconomics: Unemployment, Inflation, And Economic Fluctuations
Section: Chapter Questions
Problem 13P
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