(Real and nominal interest rates): Suppose the real return on investing in a machine is 5% and the inflation rate is 4%.

(a) According to the Fisher equation, what should the nominal interest rate be?

(b) Suppose bank A charges a nominal interest rate on loans equal to 8%. What happens?

(c) Suppose bank B advertises its nominal rate on savings accounts as 12% What happens?

(d) Suppose that nominal earnings on saving accounts are taxed at 20%. If the inflation rate is 5% and the nominal interest rate is 10%, what are the before-tax and after-tax real interest rates ?

(e) How would your answer change if the inflation rate is 15% and the nominal interest rate is 20%?