Assume that the term structure effect and the default-risk premium remain unchanged and that households and firms have adaptive expectations.
At the beginning of 2013, a bank is offering car loans at a nominal interest rate of 7 and the expected rate of inflation is 2 , and at the beginning of 2014, the bank decreases the nominal interest rate to 5. The real interest rate at the beginning of 2014 is A) 2.
B) 3.
C) 5.
D) This cannot be determined without being given the expected inflation rate for 2014.
Question 2
When the rental price of capital is above the equilibrium price ________.
A) we have an excess supply of capital and the rental price should fall
B) we have an excess demand of capital and the rental price should fall
C) we have an excess supply of capital and the rental price should increase
D) we have an excess demand of capital and the rental price should increase
E) none of the above
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