Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan.

a. In a given year, the average rate paid by banks on savings accounts was 3.85 percent. The subsequent year, it was found that the average saver’s real rate of interest received on bank deposits was 2.29 percent.

Can you guess what was the inflation rate during that period?

b. Banks expect that the rate of inflation in the coming year will be −2.9 percent, in other words, a deflation is expected. They want a real return of 6 percent.

What nominal rate should they charge borrowers?

Explain, using the Fisher equation.