Question

Question 4 (1 point)

Suppose that Mary borrows $10,000 from the Last Midwest Bank with a fixed (nominal) interest rate of 5 percent. (A fixed interest rate just means the interest rate doesn't change over the life of the loan). When the loan was made both Mary and the bank expected an inflation rate of 3.1 percent. When the loan was made, Mary and the bank expected the real interest rate to be ________ percent. **You must report your answer using one decimal place. Do not include the % sign. For example, 15.1 or 26.8 or -17.3 or 19.0 (not just "19" ... If your answer is a whole number, you still must report it using one decimal or it may be marked as incorrect)**

Question 5 (1 point)

Continuing the scenario described in the last question: Suppose that Mary borrows $10,000 from the Last Midwest Bank with a fixed (nominal) interest rate of 5 percent. Sometime after the loan was signed, both Mary and the bank were surprised when the newspaper reported the inflation rate was actually 8.5 percent. (If you look at the last question you'll see this isn't what they expected when they signed the loan)

Based on this new information, the actual real interest rate turned out to be ________ percent.  **You must report your answer using one decimal place. Do not include the % sign. For example, 15.1 or 26.8 or -17.3 or 19.0 (not just "19" ... If your answer is a whole number, you still must report it using one decimal or it may be marked as incorrect)**

Question 6 (1 point)

Based on your answers to the last two questions, which is the following is true?

Question 6 options:

	Both Mary and the bank were better off than they expected to be when the loan was signed.
	Both Mary and the bank were worse off than they expected to be when the loan was signed.
	Mary was better off than she expected to be when the loan was signed and the bank was worse off than they expected to be when the loan was signed.
	Mary was worse off than she expected to be when the loan was signed and the bank was better off than they expected to be when the loan was signed.

Question 7 (1 point)

In a sentence of two explain your answer to question 6

Answer 1

Question 4:-

Answer:-

real interest rate means intrest rate after adjusting the inflation. so here R = nominal rate / (1+inflation)

R = 5/ 1+0.31

= 5/1.031

= 4.8

so Real interest rate is 4.8

Q-5 Answer :- Real interest rate = 5 / 1.0.085 = 5/1.085 = 4.6

Q-6 answer:- Both Mary and the bank were worse off than they expected to be when the loan was signed.

Q-7 answer:- because of inflation the interest rate will become down. that means if prices rise then real interest rate decrease