Many kinds ofloans, like student loans andmortgages, can be taken out at either a fixed or variable rate. A fixed rate loan allows the borrower to pay the same nominal interest rate for the entire lifetime of theloan, while a variable rate loan may experience changes in the nominal interest rate as the rate that banks charge each other for overnight loans changes. For thisproblem, assume that the variable nominal interest rate adjusts such that the associated real interest rate remains constant over time.

In the firstyear, inflation is 2.75 percent and the nominal interest rate for both fixed and variable rate loans is 5 percent.

Given thisinformation, the real interest rate for fixed rate loans is __________ percent and the real interest rate for variable rate loans is ________ percent. (Round your response to the nearest twodecimals)

In the secondyear, inflation rises to 3 percent.

Given thisinformation, the nominal interest rate for fixed rate loans is _________ percent and the real interest rate for fixed rate loans is_________ percent. (Round your response to the nearest twodecimals)

In the secondyear, inflation rises to 3 percent.

Given thisinformation, the nominal interest rate for variable rate loans is _________ percent and the real interest rate for variable rate loans is __________ percent. (Round your response to the nearest twodecimals)

Suppose the inflation rate in an economy falls.

Given theinformation, the real interest rate for fixed rate loans would _________

a. increase

b. decrease

c. remain constant

and the real interest rate for variable rate loans would _________

a.increase

b. decrease

c. remain constant

Suppose you are deciding between a fixed rate loan and a variable rate loan. You dislike risk(variability) in the real interest rate you pay.

Given thisinformation, you should opt for a _________

a. variable rate loan

b. fixed rate loan