Yvonne Takes Out a Fixed-Interest-Rate Loan and Then Inflation Turns

question 83

Multiple Choice

Yvonne takes out a fixed-interest-rate loan and then inflation turns out to be higher than she had expected it to be.The real interest rate she pays is

• A)higher than she had expected,and the real value of the loan is higher than she had expected.
• B)higher than she had expected,and the real value of the loan is lower than she had expected.
• C)lower than she had expected,and the real value of the loan is higher than she had expected.
• D)lower then she had expected,and the real value of the loan is lower than she had expected.

---

Definitions:

International Payments

Transactions between countries involving the transfer of money and payments for goods and services across borders.

Merchandise Exports

Goods produced domestically and sold to buyers in another country.

Freely Floating Exchange Rates

A system where the value of currencies is determined by supply and demand in the foreign exchange market without direct intervention by central banks.

Bretton Woods Agreement

An agreement established in 1944 which set up an international monetary system based on fixed exchange rates and established the International Monetary Fund (IMF) and the World Bank.