Assume That the Real Rate of Interest Is 5 Percent

question 43

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 10 percent,

• A) the lender benefits from inflation, while the borrower loses from inflation.
• B) the borrower benefits from inflation, while the lender loses from inflation.
• C) neither the borrower nor the lender benefits from inflation.
• D) both the borrower and the lender lose from inflation.

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Definitions:

Production Process

The series of operational stages in the manufacture of goods, from the acquisition of raw materials to the final product.

Analytic Production System

A system that uses analytical methods to optimize production and operational efficiencies.

Raw Materials

Basic materials from which products are made, including metals, plastics, textiles, and natural resources.

Short-term Contracts

Employment agreements with a limited duration, typically less than one year.