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Consider an economy in which loans can be of two kinds. Loans may be made and
repaid in terms of gold or they may be made and repaid in terms of cash. Suppose all
markets are perfectly competitive, which also implies that there are no costs of
transacting in markets. In the current period, a loan of 140 gm of gold has to be repaid
in the next period with interest of 7 gm of gold, a loan of~ 120 has to be repaid with
interest of~ 18 and all lenders and borrowers are indifferent between gold loans and
cash loans. What is the expected percentage rise in the rupee price of gold next period?
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