Unexpected inflation, Calculate and interpret the own

Unexpected inflation

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Reference no: EM137068

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.

Reference no: EM137068

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