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Measuring Inflation

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In the United States of Albion, expected inflation is 5% and the real interest rate is 2%.
(a) What is the nominal interest rate?
(b) If inflation turns out to be 10% instead, what is the ex post real interest rate? Who
gains and who loses from this error in forecasting inflation?
(c) Recalculate your answers for (a) and (b) for net interest rates when the tax rate is
50%.

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Solution Summary

Measuring Inflation is advised. References are also provided to further validate the findings.

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Measuring Inflation
In the United States of Albion, expected inflation is 5% and the real interest rate is 2%.

(a) What is the nominal interest rate?

(1+Nominal required rate of return) = (1+Real rate of return) *(1+inflation) 

Hence (1+n)=(1+2%)*(1+5%)
n= ...

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