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Caffieneland is a small country in Central America. The mainproduct of the country is coffee, which is currently priced at$1.20 per cup. Inflation is expected to be 3% per year, and thenominal interest rate is 10% per year.

a. Calculate the real interest rate.

b. Suppose you wanted to borrow 1000 cups of coffee now, and payback the loan next year. How many cups of coffee would you owe?What is the interest rate for this coffee loan? Hint: Borrow moneynow and use it to buy coffee at the current price. Then calculatehow much you owe in dollars next year. Use next year’s coffee priceto determine how much you owed in terms of “cups of coffee.”

c. Juan Valdez, a brilliant local scientist, has invented acoffee replicator. The replicator works as follows: At time 0, youinsert 1,000 cups of coffee. These cups are consumed by themachine, that is you have to ‘invest 1,000 cups now to make thereplicator operate. Then, for each of the next five years, thereplicator produces 300 cups of coffee. You get 300 cups at time 1,another 300 cups at time 2, and so on. After five years thereplicator is used up. Calculate the PV of the replicator in termsof dollars.

d. Now calculate the PV of the replicator in terms of coffee.Hint: Use cups of coffee as your currency. Make a Coffee-Flowdiagram and then calculate the PV. Be sure to use the coffeeinterest rate in your PV calculations. e. Convert the PV in termsof coffee from part d into dollars. Multiply the answer from d bythe current price of coffee.

show work please!