You Borrow $10,000 Today at a Nominal Rate of 5

question 86

Multiple Choice

You borrow $10,000 today at a nominal rate of 5 percent; inflation for the past 10 years has been exactly 2 percent.Today,inflation instantly rises to 4 percent and stays that way for the duration of your loan.Based on the above information and all else being equal,today

• A) you are worse off because inflation has risen.
• B) you are better off strictly because 5 percent is still more than 4 percent.
• C) you are better off because you are paying back the loan with dollars that represent less purchasing power today than the dollars you borrowed before.
• D) the lender is better off because the real rate of interest automatically increases when inflation increases.
• E) both you and the lender are better off because real rates fall when inflation rises.

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Definitions:

Time

A continuous, irreversible sequence in which events occur from the past, through the present, and into the future.

Activities

Tasks, exercises, or actions performed by individuals, often for specific purposes such as leisure, learning, or physical health.

Reminiscing

The process of remembering previous events or experiences, frequently accompanied by feelings of nostalgia.

Residential Community

A specific geographic area where people live, often sharing certain amenities or governed by common regulations.