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.

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Definitions:

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Fine Motor Skills

The capability to use small muscles, typically in the hands and fingers, for tasks requiring precision, such as writing or manipulating small objects.

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