Q1. 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.
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?
Q2. Demand estimation: Qxd = 100 - 3Px + 4Py - 0.01M + 2Ax.
Where Ax represents the amount of advertising spent on shoe (x), Px is the price of good X, Py is the price of good Y and M is average income. Suppose good X sells at RM25 a pair, good Y sells at RM35, the company utilizes 50 units of advertising, and average consumer income is RM20 000. Calculate and interpret the own price, cross price, and income elasticity of demand.