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Question 2 Source B: Simon's Time Deposits Account with ABC Bank Time Deposits Time deposit account Time Deposit At the beginning of this year, Simon's Relationship Manager of ABC bank offered a preferential interest rate to him for a time deposit. In order to earn some interest income, he accepted this offer and made a time deposit. You can find this transaction record in Source B. A year later, he is expected to receive HK$515,000. Deposit Term: 1 year Your ghle New Fund Balance HD X 500.000 Enjoy preferential interest rate with a deposit of mount or below. Principal HKD 500,000.00 At the same time, Simon learnt that the annual inflation rate was estimated to be 2% by the end of the year based on some economic forecast Debit account HKD Savings 100.00 (a) Based on the information provided in Source B, calculate the nominal interest rate and real interest rate at the beginning of this year. Show your workings and quote relevant Economic concept to support your workings. Express the interest rates in terms of percentage.(7 marks) (b) Suppose by the end of this year, the Consumer Price Index (CPI) drops from 180 to 175.5. Calculate the actual inflation rate and show your workings. Identify this economy phenomenon based on your calculation. (4 marks) (c) Based on your finding in part (b), i) how does it affect the actual real interest rate of this time deposit? Is it higher or lower than expected? Explain with data. (3 marks) ii) How does this unexpected change in inflation rate affect the redistribution of wealth between the bank and Simon? Which one will gain and which one will lose? Explain. (6 marks)

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