Suppose a Loan of $100 Is Made at a Fixed

question 32

Multiple Choice

Suppose a loan of $100 is made at a fixed nominal interest rate of 5% for one year. During the year,there is unexpected inflation of 7%. Which of the following is true?

• A) The inflation has redistributed income from the lender to the borrower
• B) The real rate of interest is 12%
• C) The borrower will be obligated to repay $107 instead of $105
• D) The real rate of interest is 2%
• E) None of the above

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Definitions:

Debits

Entries on the left side of an account ledger, indicating an increase in assets or decrease in liabilities and equity.

Credits

Entries in accounting that increase liabilities, revenue, or equity accounts, or decrease asset or expense accounts, reflecting a gain in financial statements.

Chart of Accounts

An organized list of all accounts in a business entity's financial records, each with a unique identifier.

Journal Entry

A record in accounting that represents a transaction in the general ledger, where each transaction is recorded with both a debit and a credit.