Question

The ex post real interest rate will be greater than the ex ante real interest rate when the: A) rate of inflation is increasing. B) rate of inflation is decreasing. C) actual rate of inflation is greater than the expected rate of inflation. D) actual rate of inflation is less than the expected rate of inflation.

Answer 1

The ex post real interest rate is greater than the ex ante real interest rate when the actual inflation is less than expected, leading to a higher than expected real cost of borrowing.

Step-by-step explanation:

The ex post real interest rate will be greater than the ex ante real interest rate when the actual rate of inflation is less than the expected rate of inflation. When inflation is lower than anticipated, the real interest rate effectively increases beyond what was expected at the time the loan was issued. For example, if the nominal interest rate is 7% and the expected inflation was 3%, borrowers would anticipate a 4% real interest rate. However, if there is an unexpected deflation of 2%, the real interest rate would rise to 9%, which can hurt borrowers by increasing the real cost of their debts and can potentially lead to widespread defaults and a decrease in aggregate demand, risking a recession.

Answer 2

C. actual rate of inflation is greater than the expected rate of inflation.

Step-by-step explanation:

Ex post real interest rate is the interest rate that comes in after the fact, also know as realized return, While the Ex ante real interest rate is the expected return or anticipated interest after the fact. Ex post real interest rate would be greater with increasing inflation because money given out increase with inflation when the interest returns.