3. You own a firm that produces sail boats. Sail boats sell for $50,000. You take out a $1 MM loan at a nominal interest rate of 7%, repayable in a year, which will allow you to produce 25 sail boats.

(a) Assume 0% inflation. What is your profit after repayment of the loan?

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(b) Assume 3% inflation. What is your profit after repayment of the loan? What real interest rate did you face?

(c) Assume 3% deflation. What is your profit after repayment of the loan? What real interest rate did you face?