Suppose Bob considers borrowing $100 from Sheila at a 10 percent interest rate. They both think that a 4 percent real interest rate would be fair.

a. What was the inflation rate they both expected?

b. If the inflation rate turned out to be 8 percent, how much was the real interest rate? Who gained and who lost from this transaction, and how much because of unexpected inflation?

c. If there was a capital gain tax of 30 percent, what is the after-tax real interest rate, with the inflation rate of 5 percent?