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:

Demand Curve

A graphical representation that shows the quantity of a product or service desired by buyers at various price levels.

Tax

Mandatory financial charges or other types of levies imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Buyers

Individuals or entities that purchase goods or services for personal use, resale, or as inputs to production.

Tax Revenue

The financial returns that governments earn from taxes.