How this would affect the nominal rate of interest

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1. Suppose that there is a decrease in the expected rate of inflation. Using the loanable funds model, illustrate how this would affect the nominal rate of interest.

2. Cash now. Suppose a lottery winner wins a S 1 million dollar lottery. The winner may take the winnings either as ten S 100,000 annual payments, or as a lump sum payment. Use the concept of discounting and present value to determine an equiva lent lump sum payment if the effective annual interest rate is 5%.

Reference no: EM131977622

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