Suppose Geoff Considers Borrowing $100 from Tracey at a 10

question 50

Essay

Suppose Geoff considers borrowing $100 from Tracey at a 10 percent interest rate. They both think that a 6 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 7 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 an interest tax of 30 percent, what is the after-tax real interest rate, with the inflation rate of 8 percent?

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Definitions:

Directional Selection

A process of natural selection where individuals with traits on one end of the spectrum are more likely to survive and reproduce, leading to a shift in the population trait distribution over time.

Polyploid Cell

A cell containing more than two paired (homologous) sets of chromosomes, often found in plants and some animal species.

Flowering Plant

A plant that reproduces through the production of flowers and seeds, belonging to the angiosperm classification.