4. Assume for simplicity that marginal income tax rates are constant for everybody and equal to 40%. Also assume that expected after-tax real interest rates (which is what both lenders and borrowers care about) are not affected by anticipated inflation. (a) Explain in words why a lender would want a nominal interest rate that is more than 1% higher when inflation is expected to be 1% higher. (b) Calculate the effect of a 1% increase in anticipated inflation on the nominal interest rate. (c) Show graphically the effect of a 1% increase in inflation on the nominal interest rate in the market for loanable funds. (d) Suppose that the expected after-tax real interest rate is 2% and that the nominal interest rate is 10%. What is the anticipated rate of inflation? (e) At the expected after-tax real interest rate of 2% and the nominal interest rate of 10%, how high would inflation need to be for negative after-tax real rates? (f) Provide several reasons for why nominal interest rates are currently low. 4. Assume for simplicity that marginal income tax rates are constant for everybody and equal to 40%. Also assume that expected after-tax real interest rates (which is what both lenders and borrowers care about) are not affected by anticipated inflation. (a) Explain in words why a lender would want a nominal interest rate that is more than 1% higher when inflation is expected to be 1% higher. (b) Calculate the effect of a 1% increase in anticipated inflation on the nominal interest rate. (c) Show graphically the effect of a 1% increase in inflation on the nominal interest rate in the market for loanable funds. (d) Suppose that the expected after-tax real interest rate is 2% and that the nominal interest rate is 10%. What is the anticipated rate of inflation? (e) At the expected after-tax real interest rate of 2% and the nominal interest rate of 10%, how high would inflation need to be for negative after-tax real rates? (f) Provide several reasons for why nominal interest rates are currently low