Consider an economy where production grows exogenously at the rate of 1%. There is no capital stock and no investment so consumption equals production in each period. The subjective discount rate is 3%, the utility function is () = (), and inflation is 5%.

(a) What is the real interest rate in this economy? (Hint: Use the first order condition for consumption.)

(b) What is the nominal interest rate in this economy?

step by step good explanations please!