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Suppose a borrower and lender agree that the expected inflation rate for next year is 3%. Based on this they enter into a loan agreement
Suppose a borrower and lender agree that the expected inflation rate for next year is 3%. Based on this they enter into a loan agreement where the nominal interest rate to be charged is 7%. If inflation turns out to be 2%:
a. what is the ex ante real rate of interest, and the ex post real rate of interest?
b. who gains and who loses?
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