We can write the true relationship between the nominal interest rate and the real rate and expected inflation as:
A) (1 + r) = (1 + r) × (1 + h*)
B) r = (1 + r*) × (1 + h) - 1
C) r* = (1 + r) × (1 + h) -1
D) r = (1 + r*) × (1 + h) + 1
Answer: B
Explanation: B) The true relationship can be expressed as either (1 + r) = (1 + r*) × (1 + h) or it can be expressed as r = (1 + r*) × (1 + h) - 1.
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Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually. What is the bank's net interest income in dollars in year 3, after it refinances all of its liabilities at a rate of 6.0 percent?
A. -$60,000. B. -$140,000. C. +$140,000. D. +$60,000. E. +$800,000.
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