If a Lender Expects Inflation to Be 5 Percent, and After

question 167

Multiple Choice

If a lender expects inflation to be 5 percent, and after a loan is made, actual inflation is 10 percent, which of the following will be true?

• A) The lender will receive a lower real interest rate than he expected.
• B) The loan will be repaid with dollars that are worth more than the lender expected.
• C) The nominal rate of interest can be expected to fall in the future.
• D) The lender will gain at the expense of the borrower.

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Definitions:

Perfectly Inelastic

A situation where the quantity demanded or supplied of a good is unaffected by changes in its price.

Upward-Sloping

A term often used in economics to describe a graph line that represents an increase in one variable as another variable increases, typically applied to supply curves.

Demand Curve

A graphical representation showing the relationship between the price of a good or service and the quantity demanded for a given period.

Tax Incidence

An examination of the distribution of tax burdens, including who ultimately pays the tax (consumers or producers) and how it affects market equilibrium.