Suppose that inflation has been equal to 3% per year for several years and that the real interest rate that banks require on typical mortgage loans is 2%.
a. What nominal interest rate would banks currently be charging on typical mortgages?
b. The Federal Reserve unexpectedly increases the rate of growth of the money supply by 1%, and this change is expected to be permanent. What nominal interest rate will banks charge on new mortgages?
c. What is the actual real return on mortgages made prior to the increase in the growth rate of the money supply?