Assume That the Real Rate of Interest Is 5 Percent

question 30

Multiple Choice

Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 12 percent:

• A) neither the borrower nor the lender benefits from inflation.
• B) both the borrower and the lender lose from inflation.
• C) the borrower benefits from inflation, while the lender loses from inflation.
• D) the lender benefits from inflation, while the borrower loses from inflation.

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