Suppose that fiat money stock changes according to the numerical magnitude of z= 2 and number of young people born in each generation evolves according to the numerical magnitude of n = 1.5. In this economy, gross real interest is 1.3.

a.Calculate the gross and net inflation rates.

b.Calculate the gross and net real rates of return on fiat money.

c.Calculate the gross and net nominal interest rates.

Ineachof above your answers indicate clearly the equations you have made use of and show your steps.

Suppose people in our overlapping generations model have the opportunity to either hold fiat money with complete safety or lend it to someone with the risk of loan default of 20%. Assume a stationary equilibrium where population grows at a net rate of 8% and z = 1.What real rate of interest will be charged to the borrower if people are i) risk neutral and ii) risk averse. Explain your answers. (4 marks).