Suppose that the overnight rate and overnight rate target

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Suppose that the overnight rate and the overnight rate target are at 4.5 percent. The interest rate spread household and business borrowing should be 2.5 percent. a. To achieve the real interest rate of 2.5 percent, at what level should you set the overnight rate target? b. All conditions remain the same as above, but the interest rate spread rises from 2 percent to 3.5 percent. To achieve the real interest rate of 2.5 percent, at what level should you now set the overnight rate target? c. The interest rate spread remain at 3.5 percent but the inflation rate falls to zero .To achieve the real interest rate of 2.5 percent , at what level should now set the overnight rate target ? Do you have a problem?

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