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.