Question: (11.3) In the United States of Albion, expected inflation is 5% and the real interest rate is 2%. (a) What is the nominal interest rate?

(11.3) In the United States of Albion, expected inflation is 5% and the real interest rate is 2%.

(a) What is the nominal interest rate?

(b) If inflation turns out to be 10% instead, what is the ex post real interest rate? Who gains and who loses from this error in forecasting inflation?

(c) Recalculate your answers for

(a) and

(b) for net interest rates when the tax rate is 50%.

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