Now consider the following informationfrom Round 2 of the same variation. Borrow

Question

Now consider the following informationfrom Round 2 of the same variation.
Borrower Nominal Rateof
Return on Project (%) Ayon 13.8 Barb 13.0 Carlos 12.2 Darius 11.4 Ellen 10.6 Fay 9.8 Grace 9.0 Habeeb 8.2 Ida 7.4 Jack 6.6

The nominal T-bill interest rate is 7.0% in Round 2. The inflationrate over the course of Round 2 is 6.0%.

Which of the following results would supply and demand analysispredict for Round 2? A.   Borrowers and lenders will arrange 9loans, at nominal interest rates of 6.6% or slightly lower. B.   Borrowers and lenders will arrange 9loans, at nominal interest rates of 1.0% or slightly higher. C.   Borrowers and lenders will arrange 8loans, at nominal interest rates of 6.6% or slightly higher. D.   Borrowers and lenders will arrange 9loans, at nominal interest rates of 7.0% or slightly higher. E.   Borrowers and lenders will arrange 9loans, at nominal interest rates of 6.0% or slightly lower.

Explanation / Answer

I am going to give you my opinion on this one, I believe theanswer is D.   Borrowers and lenders will arrange 9loans, at nominal interest rates of 7.0% or slightly higher. Since there are 10 people here, only 9 will work because theother one makes less than the T-bill interest rate of 7%, so it islogical to think that, the return should be higher than T-billinterst rate, so only 9 loans will work about the rate of returnhas to be higher than 7% D.   Borrowers and lenders will arrange 9loans, at nominal interest rates of 7.0% or slightly higher.

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