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.

---

Definitions:

R&D Expenditures

Financial resources dedicated to research and development efforts aimed at developing new products or enhancing current offerings.

Expected Rate of Return

The anticipated amount of profit or loss an investment is likely to generate relative to its cost.

Interest-Rate Cost of Funds

The Interest-Rate Cost of Funds is the interest rate that financial institutions pay for the funds they use in their business, influencing the rates they charge on loans.