3. (35 points) Effects of Monetary Policy Consider question 1 again without any Government spending increase. In its next meeting, Central Bank is expected to reduce the reserve requirement ratio(RRR). Interest rate is currently 8%. As a result of Central Bank's action, the interest rates will either drop by 1% or by 1.5% with a chance of 60% and 40% respectively. a) If Jennifer was financing the $760 thousand with a 3-year loan (equal payments beginning next year) what is her expected NPV for the 5-year project? b) Independent from its interest rate effect, the reduction in RRR also causes inflation to go up by a Moderate or a High level with 70% chance and 30% chance respectively. From past experience, Lisa knows that an economy-wide inflation affects her costs but not her price. A moderate inflation would cause her costs to rise from $760 thousand to $780 thousand and a high inflation would cause her costs to go up to $800 thousand. What is the expected NPV of the investment given different scenarios of inflation and interest rate changes. 3. (35 points) Effects of Monetary Policy Consider question 1 again without any Government spending increase. In its next meeting, Central Bank is expected to reduce the reserve requirement ratio(RRR). Interest rate is currently 8%. As a result of Central Bank's action, the interest rates will either drop by 1% or by 1.5% with a chance of 60% and 40% respectively. a) If Jennifer was financing the $760 thousand with a 3-year loan (equal payments beginning next year) what is her expected NPV for the 5-year project? b) Independent from its interest rate effect, the reduction in RRR also causes inflation to go up by a Moderate or a High level with 70% chance and 30% chance respectively. From past experience, Lisa knows that an economy-wide inflation affects her costs but not her price. A moderate inflation would cause her costs to rise from $760 thousand to $780 thousand and a high inflation would cause her costs to go up to $800 thousand. What is the expected NPV of the investment given different scenarios of inflation and interest rate changes