12 Suppose that the demand for and supply of bonds both change with the state of the business cycle.

In economic expansions, the demand for bonds is given by the equation D 5 200 1 2,000r and the supply of bonds is S 5 500 2 1,000r where r is the expected real interest rate.

In recessions, however, both the demand for and supply of bonds is lower:

D 5 150 1 2,000r S 5 300 2 1,000r a Given these equations, what is the equilibrium expected real interest rate in economic expansions?

b Given these equations, what is the equilibrium expected real interest rate in recessions?

c If the expected inflation rate is 4 percent in economic expansions, what is the equilibrium nominal interest rate in economic expansions?

d If the expected inflation rate is 2 percent in recessions, what is the equilibrium nominal interest rate in recessions?