Assume investors expect a 2.0 percent real rate of return over the next year. If inflation is expected to be 0.5 percent, what is the expected nominal interest rate for a one-year U.S. Treasury security?

2. A very small country’s gross domestic product is $12 million.
a. If government expenditures amount to $7.5 million and gross private domestic investment is $5.5 million, what would be the amount of net exports of goods and services?

3. A ten-year U.S. Treasury bond has a 3.50 percent interest rate, while a same maturity corporate bond has a 5.25 percent interest rate. Real interest rates and inflation rate expectations would be the same for the two bonds. If a default risk premium of 1.50 percentage points is estimated for the corporate bond, determine the liquidity premium for the corporate bond.

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