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.

---

Definitions:

Material Purchase Price Variance

A reiteration, focusing on the deviation between the actual amount paid for material and the standard cost.

Standard Price

The predetermined cost assigned to materials, labor, and overhead for the purpose of budgeting and cost control.

Actual Purchase Price

The specific cost paid for goods or services at the time of purchase, as opposed to the budgeted or standard cost.

Variable Manufacturing Overhead

The portion of manufacturing overhead costs that varies with the level of production, such as utilities or materials used in the production process.