During the early 1980s, the U.S. economy experienced an increase in interest rates quoted on U.S. Treasury debt, business loans, and mortgages. At the same time the inflation rate gradually declined more than expected. What happened to ex ante versus ex post real interest rates during this period? Use the Fisher equation to support your answer.
What will be an ideal response?
The Fisher equation is: i = r + ?e.
The Fisher equation can be used to compute the ex ante real interest rate. The ex post real interest rate is computed using actual inflation in place of expected inflation. If nominal interest rates increase and the inflation rate decreased, this implies the ex post real interest rate must have decreased. If inflation declined more than expected, this would imply that the ex post real interest rate exceeded the ex ante real interest rate.
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