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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Definitions:

Independent

Refers to a characteristic where two events have no influence on each other's occurrence.

Mutually Exclusive

Two or more events that cannot occur at the same time.

Insurance Company

An organization that offers insurance policies to protect individuals and businesses against financial loss.

Marital Status

A classification of an individual's relationship status, which includes categories such as single, married, divorced, or widowed.