1. An investor earned a 5 percent nominal risk-free rate over the year. However, over the year, prices increased by 2 percent.

The investor's real risk-free rate was less than his nominal rate of return.

True or False? Why?

1. An investor wants to be able to buy 4 percent more goods and services in the future in order to induce her to invest today. During the investment period prices are expected to rise by 2 percent.

Which statement(s) below is/are true? Explain

I. 4 percent is the desired real risk-free interest rate.

II. 6 percent is the approximate nominal rate of interest required.

III. 2 percent is the expected inflation rate over the period.