1. Suppose you borrow money at a nominal interest rate of 14%. At the time you borrow the money, you expect inflation to be 8%. The real interest rate you expect to pay on your loan is%. 2. Suppose that when you pay back the loan, inflation turned out to be 9%. The real interest rate you actually pay back is.
3. Suppose that when you pay back the loan, inflation turned out to be 5%. The real interest rate you actually pay back is.
4. Think about the case where inflation turned out to be higher than expected. You initially thought inflation was going to be 3%, but it turned out to be 9%. Since the inflation rate turned out to be higher thanexpected, then than you both expected.

1) 6% , 2) 5% , 3) As inflation rate ise higher than expected inflation rate, real interest rate would be lower than expected real interest rate

Explanation:

Real Interest Rate is the interest rate, which accounts for the impact of inflation.

Real Interest Rate = Nominal Interest Rate - Inflation

1) 14% - 8% = 6%

2) 14% - 9% = 5%

3) In case of variation in expected & actual inflation rate

1 + nominal interest rate = (1 + real interest rate) (1 + expected inflation rate)

1 + 14% = (1 + r) (1 + 3%)

1.14 = (1 + r) (1.03)

1.14 = 1.03 + 1.03r

0.11 = 1.03r

r = 8.82  {If inflation is higher at 9%}

If inflation could have been at expected 3%, real interest rate could have been 14% - 3% = 11%.

So : As inflation rate turned out to be higher than expected inflation rate, real interest rate turned out to be lower than expected real interest rate

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