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.

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Definitions:

Saving

The portion of income not spent on current consumption but reserved for future use.

Total Income

The aggregate amount of income received by an individual or household from all sources before taxes or deductions.

Utility Function

A mathematical representation of how a consumer derives satisfaction or utility from consuming various amounts of goods or services.

Demand Function

A mathematical relationship that illustrates the quantity of a product or service consumers are willing to buy at various prices.