Use the table below to answer questions 24 - 27

Nominal Interest RatePrice index (CPI)Expected InflationJanuary 1, 20082.71212.1743.4January 1, 2009211.933

Notes:

Expected inflation data is one year hence, so expected inflation for the period from Jan. 1, 2008 to Jan. 1, 2009 is given in Jan. 2008. So the data in the table indicates that in Jan. of 2008, inflation was expected to be 3.4% over the next 12 months

Use the provided CPI data to calculate the actual inflation rate that occurred between January 2008 and January 2009 (hint: just calculate the % change in the CPI).

3.4%

0.24%

-1.23%

-0.11%

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Question 25

3pts

The ex-ante real rate of interest between January 2008 and January 2009 is:

-0.69%

6.11%

2.82%

-2.68%

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Question 26

3pts

The ex-post real rate of interest between January 2008 and January 2009 is:

2.82%

-0.69%

6.11%

3.65%

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Question 27

3pts

We know that most decisions are in part, based on expectations of the future. Suppose we have two people who are trying to decide whether to consume today (assume it is currently January 2008) or save for the future and consume one year later, in January 2009. One person, let's call him Joe, is basing his decision on the ex-ante real rate of interest like most of us do. The other person who has a crystal ball, we'll call her Crystal, can see exactly what the actual rate of inflation is going to be and thus, has perfect foresight and bases her decision on the ex-post real rate. Look at the difference in the ex-ante and ex-post real rates you calculated in #25 and #26 above. Who would be more likely to save and who would be more likely to spend?

both Joe and Crystal are spenders.

Crystal saves, Joe spends.

Crystal spends, Joe saves.

both Joe and Crystal are savers