(a) James is applying for a new home loan. He wishes to borrow $250,000 and make...

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(a) James is applying for a new home loan. He wishes to borrow$250,000 and make his repayments monthly. The interest rate thebank has quoted him is 4% per annum. 1. Is this the real rate ofinterest or the notional rate of interest? 2. Explain thedifference between the real rate of interest and the notional rateof interest. 3. Calculate the real rate of interest and thenotional rate of interest for James. 4. Is it possible for the realrate of interest to equal the notional rate of interest? Explain.(b) The Reserve Bank of Australia has announced a 0.25%decrease in the cash rate. What effects does this have on theeconomy and the financial markets? Provide examples of who mightbenefit from this decrease and those that do not.

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Answer to A Part 1 The interest rate of 4 per annum is the notional rate of interest Banks usually charge notional rate of interest on their loans Answer to A Part 2 Notional Interest Rate or Nominal Interest Rate is Inflation unadjusteddoes not take into account Interest RateOn the other hand Real Interest Rate is Interest Rate adjusted for Inflation Nominal Interest Rate cannot be negative but Real Interest Rate can be negative when the inflation exceeds the nominal See Answer

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