PART B ONLY !!!!!!!!!!!!!!!!!!!!!!!!!!

Problem 3 (a) (i) Suppose that the nominal interest rate is 5% per year and the inflation rate is 2%. What is the real interest rate. (ii) What happens to the real interest rate when the inflation rate changes to 5% and 8%, but the nominal rate stays at 5%? (iii) For a fixed nominal interest rate of 5% per year, plot the real interest rate versus inflation rate, for inflation rate between 0 and 10%. In all cases use the accurate formula of the relationship between the real and nominal interest rate. (b) Find the forward rate r(0;t, t2) given the zero rate curves r(0;t) and r(0;t2), t2 > t, assuming simple rate compounding, where t and t2 are measured in years