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5) A banker must earn at least a 3.5% return after expected inflation on short term...

5) A banker must earn at least a 3.5% return after expected inflation on short term loans. The inflation rate for the past 6 months has averaged 4.3%. The expected inflation rate for the next twelve months is 4.7%. Nominal interest rates for short term loans were 6.7% last month. What is the minimum nominal interest rate that he should charge for a one year loan?

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Minimum rate to be earned on bonds less than or equal to 1 year term is 3.5% in addition to the expected inflation rate. The latter is equal to 4.7%. Hence the minimum nominal interest rate 3.5% + 4.7% = 8.2% he should charged for 1 year loan.

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