Assume the following: The nominal interest rate in period 1 was 4% but only was 3% in period 2. The inflation rate in period 1 was 2% but the expected rate of inflation was 1%. In period 2 however, the expected rate of inflation was 2% and the actual inflation rate was 3%. a. What is the ex post real interest rate in period 1? b. What is the ex-ante real interest rate in period 2? c. If you borrow money in period 1 based on the ex-ante real expected inflation in period 1, will you be happy or sad when you pay back the loan in period 2?
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