1. A person borrows $10,000 today at a nominal interest rate of 5%; inflation for the past 10 years has always been 2%. Today, inflation instantly rises to 7% and stays that way for the duration of the loan. Based on the above information, ceteris paribus (all else equal), today:
a. you will pay the lender back exactly $10,700.
b. the real rate of interest on your loan is 14%.
c. the real rate of interest on your loan was previously 10% and is now 35%.
d. the real rate of interest on your loan is now –2%.
e. you will pay the lender back exactly $9,500.
2. The Harrod-Domar model is based on the following assumption(s):
a. the marginal product of capital is constant.
b.the marginal product of capital is not constant.
c. saving is greater than productive investment.
d. saving is less than productive investment.