Suppose that you just purchased a used car worth $12,000 in today’s dollars. Assume also that, to finance the purchase, you borrowed $10,000 from a local bank at 9% compounded monthly over two years. The bank calculated your monthly payment at $456.85. Assume that average general inflation will run at 0.5% per month over the next two years.
(a) Determine the annual inflation‐free interest rate (i′) for the bank.
(b) What equal monthly payments, in terms of constant dollars over the next two years, are equivalent to the series of actual payments to be made over the life of the loan?