You Agree to Lend $1,000 for One Year at a Nominal

question 111

Multiple Choice

You agree to lend $1,000 for one year at a nominal interest rate of 10%.You anticipate that inflation will be 4% over that year.If inflation is instead 3% over that year,which of the following is true?

• A)The real interest rate you earn on your money is lower than you expected.
• B)The purchasing power of the money that will be repaid to you will be lower than you expected.
• C)The person who borrowed the $1,000 will be worse off as a result of the unanticipated decrease in inflation.
• D)The real interest rate you earn on your money will be negative.

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Definitions:

Employment

The condition of having paid work or being engaged in a productive activity.

Marginal Revenue Product

The additional income produced by one more unit of input, such as labor or capital, in the production process.

Variable Input

An input whose quantity can be adjusted in the short run to affect the level of output in the production process.

Marginal Revenue Product

The additional revenue generated by employing one more unit of a certain input, keeping other inputs constant.