Suppose the nominal interest rate on car loans is 11% per year, and both actual and expected inflation are equal to 4%. complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. time period nominal interest rate expected inflation actual inflation expected real interest rate actual real interest rate (percent) (percent) (percent) (percent) (percent) before increase in ms 11 4

Real Interest rate is the nominal interest rate adjusted for Inflation. It can be calculated using the following formula:

RR = (NR- IR)/(1+IR)

Where RR is real rate, NR is nominal rate and IR is inflation rate. In this problem, Nominal Rate NR = 11% and Inflation Rate IR is 4%. Therefore, Real rate would be:

RR = (0.11 -0.04)/(1+0.04)

RR = 6.73%

Therefore, real rate of return would be 6.73%.

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