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Assume that currently the nominal interest rate is 5% and people expect the rate of price inflation for the next year to be 3%. Additionally, the price level today is P-100. A lender lends $100,000 for a year to a borrower. If instead he spent the money today, he would be able to buy units of goods and services. The borrower will pay to the lender next year., With that amount of back units of goods noney, the lender will be able to buy and services next year. So the lenders real purchasing power is expected to increase by of lending. This expected rate of increase in the real pure percent over the next year as a result hasing power is called the ex-ante real interest rate and is approximated by the difference between the nominal interest and expected inflation rates

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