The managers of Longhorn Bank believe that the inflation rate over the next year will be 2%. Dora's Pancake House seeks a loan from Longhorn Bank and believes that the inflation rate is going to be 5%. They agree that if the inflation rate was expected to be zero, the interest rate on the loan would be 8%. If Longhorn Bank wishes to earn a positive return on the loan in real terms, the lowest nominal interest rate that it will accept must be greater than and the highest nominal interest rate that Dora's will agree to pay is .
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The managers of Longhorn Bank believe that the inflation rate over the next year will be 2%. Dora's...
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