Question: 1. a. A bank which is considering a fixed rate, three year loan to a customer requires a 2% per annum real return and makes

1. a. A bank which is considering a fixed rate, three year loan to a customer requires a 2% per annum real return and makes the following inflation rate forecasts: Year 1: 1.5% Year 2: 1.2% Year 3: 2.0% What is an appropriate three year interest rate for the loan? 5 marks b. If during the loan period the average inflation was 2% per year, which party benefits from the additional inflation? Discuss the reason

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