Question

New to this concept, please show step by step and explain, thanks!

Calculate the ex-post real rate of interest between May of 1958 and May of 1959.

One Year Interest Rates:

5/1/1958 = 1.37

5/1/1959 = 3.96

Answer 1

Ex-post real rate of interest is the interest rate which was actually realized due to inflation. As an example, lets say a bank charges 5% interest rate for a year, but the inflation is high and at 8% that year. This has reduced the value of money by 8% and hence actual interest rate (called ex-post real rate of interest) is lower.

Ex post real interest rate is given by

r=i-realized inflation,where i is the nominal interest rate.

In our case, the realized inflation between May 1958 and May 1959 is

1.37-3.96=-2.59%

Nominal interest rate is not given in the question. As an example, if it was 2%, then

Ex post real interest rate=2-(-2.59%)=4.59%