Consider a family who buys an apartment for $300,000 and takes a mortgage loan equal to the full amount at 7% annual interest. a. The annual cost of interest is $______________ b. Since the apartment is a real commodity, its nominal value will probably increase at the rate of inflation. If the expected rate of inflation is 4%, the apartment is expected to increase in value by about $___________ each year. c. Consequently, the expected real cost of the mortgage is equal to the difference between the annual mortgage payments and the expected appreciation of the apartment. This amount equals $__________ each year, or expressed as a percentage of the initial loan equals __________ percent. Thus, the expected real cost of the loan is equal to the initial (ex ante) nominal interest rate i-E=__________ percent. d. Suppose that there is unexpected inflation, and the actual rate of inflation during the year is 6%. Since the mortgage loan was agreed in terms of nominal interest rate, the annual mortgage interest payment remains equal to $___________. The nominal value of the apartment, however, now has increased by the actual rate of inflation, that is, by _______ percent, or by about $__________. Consequently, the real cost of the mortgage is equal to $__________each year, or __________ percent of the initial loan. Thus, the actual real cost of the loan is equal to the actual (ex post) real interest rate, i-, which equals _______ percent.