1. Bank Loan

Suppose you take out a loan for school this year for $25000. The bank expects that the rate of inflation for next year will equal 4%. You and the bank agree that in one year's time, you will pay back the full amount at an interest rate of 10%. Next year though, there is a sudden rise in inflation, causing inflation to equal 14%.

Complete parts a, b, and c.

a. How much will you pay back in one year?

b. What is the unanticipated rate of inflation in this example?

c. What is the real rate of interest in this example?