1) THE 1-YEAR REAL RATE OF INTEREST IS CURRENTLY ESTIMATED TO BE 4 PERCENT. THE CURRENT ANNUAL RATE OF INFLATION IS 6 PERCENT, AND MARKET FORECAST PREDICT THE ANNUAL RATE OF INFLATION TO BE 8 PERCENT. WHAT IS THE CURRENT 1-YEAR NOMINAL RATE OF INTEREST ?

2) THE FOLLOWING ANNUAL INFLATION RATES HAVE BEEN FORECAST FOR THE NEXT 5 YEARS:

YEAR 1 3%

YEAR 2 4%

YEAR 3 5%

YEAR 4 5%

YEAR 5 4%

USE THE AVERAGE ANNUAL INFLATION RATE AND A 3 PERCENT REAL RATE TO CALCULATE THE APPROPRIATE CONTRACT RATE FOR A 1-YEAR AND 5-YEAR LOAN. HOW WOULD YOUR CONTRACT RATE CHANGE IF THE YEAR-1 INFLATION FORECAST INCREASED TO 5 PERCENT? DISCUSS THE DIFFERENCE IN THE IMPACT ON THE CONTRACT RATES FROM THE CHANGE IN INFLATION.