Suppose that in 2014 Julie lends Bill $1,000 to be repaid in 2015 at a nominal interest rate of 5%. Additionally, suppose Julie and Bill both expect prices to rise by 2% between 2014 and 2015.
a. How much money will Bill repay Julie in one year, in 2015 dollars?
b. What is the ex ante real interest rate?
c. How much money does Bill expect to repay Julie in one year, in 2014 dollars?
d. Suppose prices actually rise 4% between 2014 and 2015. What is the ex post real interest rate? How much does Bill actually repay Julie in terms of 2014 dollars?
e. Who benefits from higher-than-anticipated inflation? Who is hurt by higher-than anticipated inflation? How can you tell?
f. Repeat part d), but suppose that prices actually rise 1% between 2014 and 2015.
g. Who benefits from lower-than-anticipated inflation? Who is hurt by lower-than anticipated inflation? How can you tell?