Assume that currently the nominal interest rate is 5% and people expect the rate of price inflation for the next year to be 3%. Additionally, the…
) units of goods and services next year. So the lender’s real purchasing power is expected to increase by ( ) percent over the next year as a result of lending. This expected rate of increase in the real purchasing power is called the ex-ante real interest rate and is approximated by the difference between the nominal interest and expected inflation rates.
