Question #1 (4 points)

A) All over the world, the financial system is among the most heavily regulated sectors. By giving reasons, explain in detail why such regulations are needed for this sector. (2 points)

B) What is the distinction between the nominal interest rate and the real interest rate? Which is a better indicator of incentives to borrow and lend? What is the real interest rate if the nominal interest rate is 8% and the expected inflation rate is 10% over the course of a year? (2 points)