Q1. The government is considering a policy to reduce air pollution by restricting the use of "dirty" fuels by factories. In making a decision whether to employ the policy, however if all should likely effects of the policy on real GDP be taken into account? Discribe.
Q2. Assume that a borrower as well as a lender agrees on the nominal interest rate to be paid on a loan. After that inflation turns out to be higher than they both expected.
a. Is the real interest rate on this loan higher or lower than expected?
b. Does the lender gain or lose from this unexpectedly high inflation? Explain does borrower gain or lose?