1. If the real interest rate is 4%, actual inflation for the last year was 5%, and expected inflation is 8%, the Fisher effect predicts what current level of nominal interest rates? Show your work. Check figure: i = 12%.

2. Assume now that the real interest rate is 3% and the expected inflation rate is 6%. If John gets a loan from the bank at 10%, which party would be rewarded at the others expense, John or the bank? Explain your answer.

3. The Fisher equation is expressed as follows, i = E(INF) + iR. Mathematically, does the equation allow for a negative real interest rate? In the real world, is a negative real interest rate possible? Explain your answers.