Real versus nominal interest rates A. Suppose the 30 year mortgage interest rate rises from 3 percen

Real versus nominal interest rates

A. Suppose the 30 year mortgage interest rate rises from 3 percent to 5 percent, and simultaneously the expected rate of inflationrises from 1 percent to 4 percent. What is the approximate change in the real interest rate? Will the demand for mortgages rise or fall as a result of thesechanges? Please explain.

B. In the year 2007, the Zimbabwe economy was estimated to have an inflation rate of 66,000 percent (i.e., A?€=660). (That is, prices were 660 times higher by the end of the year!) What nominal annual interest rate would a Zimbabwe lender making a loan and expecting repayment in Zimbabwe dollars at the end of the year need to charge in order to get a real interest rate of 5 percent? Use the exact formula for the real interestrate. If instead the lender used the approximation formula, what nominal interest rate would have been charged?