Answer Happy

The Central Bank in Westeros engages in open market operations
and sells bonds
to the non-banking sector.
1-Assume that before they implement this contractionary monetary
policy the
nominal interest rate on savings accounts is 3% per year. If banks
and
depositors expect an inflation rate of 1% per year, what is the
expected
real interest rate?
2-The contractionary monetary policy results in deflation of 2%. In
the short
run, what is the effect of this unexpected deflation on depositors
and
banks?

3- In the long run, what will happen to the nominal interest rate
and the real
interest rate as a result of this deflation?