If he were that kind of hands-on manager, this mess might not have happened in the first place.
The real risk-free rate is 4%. 1. The real risk-free rate is 4%. Inflation is expected to be 3% this year and 5% during the next 2 years. Assume that the maturity risk premium is zero.
Market interest rates = real interest rate + inflatione. 2. Using the loanable funds theory. The real cost of borrowing falls. If inflation rises the borrower can pay back the lender with cheaper dollars. At the current interest rate the demander of loanable funds (borrower) is likely to want to borrow money.