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

question 8

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 7 percent and stays that way for the duration of your loan.Based on the above information,ceteris paribus (all else equal) ,today

• A) the real rate of interest on your loan is 14 percent.
• B) the real rate of interest on your loan was previously 10 percent and is now 35 percent.
• C) the real rate of interest on your loan is now -2 percent.
• D) you will pay the lender back exactly $9,500.
• E) you will pay the lender back exactly $10,700.

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Definitions:

Purchasing Power

The value of a currency expressed by the quantity of goods or services that one unit of money can buy.

Price Level

The average of current prices across the entire spectrum of goods and services produced in the economy, indicating the general level of inflation or deflation.

Financial Intermediaries

Institutions that act as middlemen between savers and borrowers, helping to channel funds from those with surplus capital to those needing capital.

Print Money

The process by which a country's central bank creates new money, typically leading to an increase in the monetary base, used metaphorically for expansionary monetary policy.