3. Distinction Between Real and Nominal Interest Rates

a. Distinguish between a nominal versus a real interest rate.

b. If a bond gives you a 4% nominal annual interest rate and the inflation rate over the year is 2%, what is the real ex post rate of return you receive? Real Rate You Receive _______________

c. If an investor wants a real rate of return of 2% and expects inflation to be 2% next year, what nominal rate should the investor demand? Nominal Rate Investor Demands _______________