Jay and Joyce meet George, the banker, to work out the details of a mortgage. They all expect that inflation will be 2 percent over the term of the loan, and they agree on a nominal interest rate of 6 percent. As it turns out, the inflation rate is 5 percent over the term of the loan.
(a) What was the expected real interest rate?
(b) What was the actual real interest rate?
(c) Is there any redistribution of wealth with unanticipated inflation?