8a. Assume the following information. A banker will make a loan to a firm for one year. The real rate of interest of is 2% determined in the Loanable Fund Market and inflation is expected to be 3% over the next year. What nominal interest rate will she charge? b. Now, assume that after the year, the borrower pays back the loan. What is the banker's (realized) real interest rate, if actual inflation during the year is 11%? C. According to the author, what does the example in part b. demonstrate about the economic cost of unanticipated inflation to a society?

Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter22: Money Growth And Inflation
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8a. Assume the following information. A banker will make a loan to a firm for one year. The real rate of interest
of is 2% determined in the Loanable Fund Market and inflation is expected to be 3% over the next year. What
nominal interest rate will she charge?
b. Now, assume that after the year, the borrower pays back the loan. What is the banker's (realized) real
interest rate, if actual inflation during the year is 11%?
C. According to the author, what does the example in part b. demonstrate about the economic cost of
unanticipated inflation to a society?
Transcribed Image Text:8a. Assume the following information. A banker will make a loan to a firm for one year. The real rate of interest of is 2% determined in the Loanable Fund Market and inflation is expected to be 3% over the next year. What nominal interest rate will she charge? b. Now, assume that after the year, the borrower pays back the loan. What is the banker's (realized) real interest rate, if actual inflation during the year is 11%? C. According to the author, what does the example in part b. demonstrate about the economic cost of unanticipated inflation to a society?
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