Bank Loan (16 points)

Suppose you take out a loan for a car for $37,500. The bank expects that the rate of

inflation for next year will equal 11%. You and the bank agree that in one years

time, you will pay back the full amount at an interest rate of 14%. Next year though,

there is a sudden rise in inflation, causing the inflation rate to be equal to 16%.

Complete parts a, b, c, and d.

Based upon these values, how much will you pay back in one year?

Based upon these values, solve for the unanticipated rate of inflation.

Based upon these values, solve for the real rate of interest.

As covered in class, the Federal Reserve has raised interest rates six times this year. What impact will this have on inflation? What impact will this have on the level of both personal consumption expenditures and gross private domestic investment?