# Calculate the real rate of interest and the notional rate of interest for James.

This question relates to material covered in Topic 1 particularly the Australian taxation system and interest

rates. This question addresses the 1st, 2nd, 3rd and 4th subject learning outcomes.

Students are expected to conduct their own research and develop their own opinions about the merits of this topic. There is no single correct answer and students will be marked on the depth of their research, the quality of their arguments (for and against), and their demonstrated understanding of the issues involved in this complex area of financial policy.

(a)  James is applying for a new home loan. He wishes to borrow \$250,000 and make his repayments monthly. The interest rate the bank has quoted him is 4% per annum.

1. Is this the real rate of interest or the notional rate of interest?
2. Explain the difference between the real rate of interest and the notional rate of interest.
3. Calculate the real rate of interest and the notional rate of interest for James.
4. Is it possible for the real rate of interest to equal the notional rate of interest? Explain. (8 marks)

(b)  The Reserve Bank of Australia has announced a 0.25% decrease in the cash rate. What effects does this have on the economy and the financial markets? Provide examples of who might benefit from this decrease and those that do not.  (12 marks)Home Money MarketNominalinterestMSrate, isReal money supply,Mus / PusLAN21WMDReal money demand,Mus /Pus = L(is) YusMusReal moneyPusbalances, Mus/ Pus