Ted is trying to decide how much to consume during the next two periods: (c1, c2).He will get no money in period 1 and $1000 in period 2.

Ted is trying to decide how much to consume during the next two periods: (c1, c2).He will get no money in period 1 and $1000 in period 2. He has the option of borrowing or lending at an interest rate of 10%. If Ted’s utility function is U(c1, c2) =c1c2, what levels of consumption does he choose in each period if the inflation rate is also 10%? Assume that the price of consumption in period 1 is unity.

The answer is 454.55 for both periods. For a "helpful answer", also explain why is it that the real interest rate is 1.1. I thought that if interest rate and inflation are both 10%, then effects would cancel each other out. Or I may have the concept all wrong. In that case, why do I divide my income in period 2 by 1.1, which accounts for inflation, but not interest. Thanks! :)