Question 3 Interest Rates (20 marks) Some may argue that given measures outlined in the latest budget by the Minister of Finance of Trinidad and Tobago, inflation is expected to increase. Others also postulate that when Britain leaves the EU prices of goods and services in the UK are bound to rise. a) Explain how a rise in expected inflation will affect real interest rates. (8 marks) b) Using the theory of liquidity preference or the model illustrating the demand and supply of bonds, analyze the likely impact of an increase in expected inflation OR actual inflation on the nominal rate of interest. (12 marks) Question 3 Interest Rates (20 marks) Some may argue that given measures outlined in the latest budget by the Minister of Finance of Trinidad and Tobago, inflation is expected to increase. Others also postulate that when Britain leaves the EU prices of goods and services in the UK are bound to rise. a) Explain how a rise in expected inflation will affect real interest rates. (8 marks) b) Using the theory of liquidity preference or the model illustrating the demand and supply of bonds, analyze the likely impact of an increase in expected inflation OR actual inflation on the nominal rate of interest. (12 marks)