Consider the same situation as in Question 1. There are two countries: Brazil and South Africa. In the year T Brazil experienced relatively slow output growth (1%), whereas South Africa had relatively high output growth (5%). Suppose the Central Bank of Brazil allowed the money supply to grow by 2% each year, while the South African Reserve Bank chose to maintain money growth of 10% per year. In addition, the bank deposits in Brazil pay a 3% interest rate, i bra =3%. Use the general monetary model, where L is no longer assumed constant and money demand is inversely related to the nominal interest rate.

2.1. Calculate the interest rate paid on the South African Rand deposits.

2.2. Using the definition of the real interest rate (nominal interest rate adjusted for inflation), show that the real interest rate in South Africa is equal to the real interest rate in Brazil.

2.3. Suppose the South African Reserve Bank decreases the money growth rate from 10% to 7% and the inflation rate falls proportionately (one for one) with this decrease. If the nominal interest rate and inflation in Brazil remain unchanged, what happens to the interest rate paid on South African Rand deposits?