Assume That the Real Rate of Interest Is 5 Percent

question 43

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 10 percent,

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

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Definitions:

Common Resource

A resource like air or water that is not owned by anyone, is available for everyone to use, but can become depleted if overused.

Excludable

A characteristic of a good for which it is possible to prevent individuals from enjoying its benefits unless they pay for it.

Artificially Scarce

A situation where a product or resource's availability is limited through artificial means rather than natural scarcity.

Public Good

A commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization.