Suppose Bob considers borrowing $100 from Sheila at a 10 percent interest rate. They both think that a 4 percent real interest rate would be fair. nominal rate= real rate + inflation
a. What was the inflation rate they both expected? (3 marks)
b. If the inflation rate turned out to be 8 percent, how much was the real interest rate? Who gained and who lost from this transaction, and how much because of unexpected inflation? (4 marks)
c. If there was a capital gain tax of 30 percent, what is the after-tax real interest rate, with the inflation rate of 8 percent? (3 marks)