You Borrow $10,000 Today at a Nominal Rate of 5%;

question 8

Multiple Choice

You borrow $10,000 today at a nominal rate of 5%; inflation for the past 10 years has been exactly 2%.Today,inflation instantly rises to 4% and stays that way for the duration of your loan.Based on the above information and all else being equal,today:

• A) you are worse off because inflation has risen.
• B) you are better off strictly because 5% is still more than 4%.
• C) you are better off because you are paying back the loan with dollars that represent less purchasing power today than the dollars you borrowed before.
• D) the lender is better off because the real rate of interest automatically increases when inflation increases.
• E) both you and the lender are better off because real rates fall when inflation rises.

---

Definitions:

Cost Variance

The difference between the actual cost incurred and the expected cost, based on standard costing or budgeted amounts.

Standard Cost

A predetermined cost of manufacturing a single unit or a number of units of a product, which is used for budgetary and cost control purposes.

Favorable Variance

Occurs when actual performance is better than expected, leading to lower costs or higher revenues than planned.

Budgeted Revenue

The projected income that a business or organization expects to generate within a specific period, often used for planning and performance evaluation.