Loretta agrees to lend Ted $750,000 to buy computers for his consulting firm. They agree to a nominal interest rate of 9%. Both expect the inflation rate to be 3%.
i. Calculate the expected real interest rate: ________%
ii. If inflation turns out to be 4% over the life of the loan, what is the ex post (actual) real interest rate? ________% Who gains from the unexpectedly high inflation, Loretta or Ted? ________
iii. If inflation turns out to be 2% over the life of the loan, what is the ex post (actual) real interest rate? ________%
iv. Who gains from the unexpectedly low inflation, Loretta or Ted?