(a) James is applying for a new home loan. He wishes to borrow $250,000 and make his repayments monthly. The interest rate the bank has quoted him is 4% per annum.

1. Is this the real rate of interest or the notional rate of interest?

2. Explain the difference between the real rate of interest and the notional of interest.

3. Calculate the real rate of interest and the notional rate of interest for James.

4. Is it possible for the real rate of interest to equal the notional rate of interest? Explain.

(b) The Reserve Bank of Australia has announced a 0.25% decrease in the cash rate. What effects does this have on the economy and the financial markets? Provide examples of who might benefit from this decrease and those that do not.