11. Using the notions of ex ante and ex post interest rates, explain how a bank...

11. Using the notions of ex ante and ex post interest rates, explain how a bank could be expecting a huge return on its investments and end up with very small real returns.

Expert Solution

A bank could ve expecting a huge return on its investments and end up with very small real returns. This might happen because the bank has estimated its returns on the basis of ex ante interest rates. Ex ante figures are estimates which are based on forecasts rather than the actual results. On the other hand, ex post measures are the actual results or actual figures that existed at that point of time.

Let us take an example to understand why the bank might lose its money. Let us suppose the ex ante interest rate was 8% on the basis of which a bank estimated huge returns. However, a sudden pandemic hit the world and the world economy is severely affected. The interest rates are slashed to keep the economy moving. Because of this, the interest rate which the bank expected came down to say 4%. In other words, ex post interest rate was 4%. Due to this, bank will lose money because of very small real interest rates.

Rahul Sunny answered 1 year ago

11. Using the notions of ex ante and ex post interest rates, explain how a bank...

11. Using the notions of ex ante and ex post interest rates, explain how a bank could be expecting a huge return on its investments and end up with very small real returns.

11. Using the notions of ex ante and ex post interest rates, explain how a bank...

11. Using the notions of ex ante and ex post interest rates, explain how a bank could be expecting a huge return on its investments and end up with very small real returns.

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11. Using the notions of ex ante and ex post interest rates, explain how a bank...

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11. Using the notions of ex ante and ex post interest rates, explain how a bank...

11. Using the notions of ex ante and ex post interest rates, explain how a bank...

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