NEED HELP WITH SOLVING THIESE AND THE WORK IM SO CONFUSED ON WHAT TO DO

I. Interest Rates, The Zero Lower Bound and Indexed Loans Suppose Taylor borrows $100 from Travis for one year. They agree that the ex-ante real interest rate should be 2 percent. For the first part of the problem, assume that they agree to set a fixed nominal interest rate. (a) According to the Fisher Equation, what nominal interest rate should they set on the loan to ensure an ex- ante real interest rate of 2 percent, assuming that the expected inflation rate is 6 percent? What if the expected inflation rate is 3 percent? What if the expected inflation rate is zero? What is the ex-ante real interest rate in each of these scenarios? (b) Suppose the expected inflation rate is 3 percent, Taylor and Travis follow the Fisher Equation in setting the nominal interest rate (as in part (a)), and the actual rate of inflation turns out to be three percent. What is the ex-post real interest rate? Who "wins" and who "loses" as a result of this inflation outcome?(c) Redo your answers to part (b) assuming that the actual ination rate turns out to be 1 percent. Re-do your answers again, assuming that the actual ination rate turns out to be 5 percent. (d) According to the Fisher Equation, what nominal interest rate should they set on the loan if expected ination is 2 percent (that is, there is expected deation of 2 percent)? What if expected ination is 4 percent? -6 percent? Assume for the moment that there is no zero lower bound on the nominal interest rate. (e) Now suppose there is a zero lower bound on the nominal interest rate. What will the nominal interest rate actually be in each of the scenarios outlined in part (d)? (f) What is the ex-ante real interest rate implied by the nominal interest rates you solved for in part (e)? Explain why the exante real interest rate can be higher than 2 percent in some of these cases. Which of these scenarios is most favorable ex-ante for the borrower and which is most favorable for the lender? (g) Now suppose that Taylor agrees to borrow $100 from Travis using an indexed loan, instead of a xed interest rate loan. They agree that the expost real interest rate should be 2 percent. What should Taylor repay Travis after one year if the ination rate turns out to be 4 percent? 2 percent? 6 percent? 10 percent? (h) What is the expost realinterest rate that Taylor repays Travis in each of the scenarios from pa rt (g)? Which of these scenarios is most favorable expost for the borrower and which is most favorable for the lender? ll. Suppose the economy has steady ination of 10 percent per year. This ination is fully predictable, so it is fully incorporated into debt contracts using the Fisher equation (so that nominal interest rates on saving and borrowing are 10 percent higher than they would be in a zeroination world). Also, wages and government benets are fully indexed to ination, so they also rise at 10 percent per year (and wages can rise more than 10 percent if there are real productivity gains so that real wages would increase). Would inflation still be socially costly in this case? Give a couple of examples of real costs to the economy that would arise in a world of steady 10 percent inflation, compared to (say) steady zero inflation or 2 percent inflation. Ill. Since the 1930s, we have never experienced deflation in the United States, and the Federal Reserve makes preventing deflation a high priority. For instance, the Fed targets an inflation rate of 2 percent per year, rather than zero inflation, because the Fed wants to make sure that if they miss their target on the down-side, they get zero or 1 percent inflation instead of 1 or 2 percent deflation. Why is the Fed so worried about deflation? Discuss one reason why deflation could be bad for the economy