M&B3 3rd Edition by Dean Croushore

Exercise 1

In each of the following situations, explain whether borrowers or lenders are worse off, better off, or equally well off because of unexpected infl ation.
a Expected infl ation one year ago was 4 percent; actual infl ation over the year turned out to be 7 percent.
b Expected infl ation one year ago was 5 percent; actual infl ation over the year turned out to be 3 percent.
c The nominal interest rate on a loan was 8 percent; the expected real interest rate on the loan was 4 percent; actual infl ation over the year turned out to be 3 percent.
d The nominal interest rate on a loan was 8 percent; the expected real interest rate on the loan was 5 percent; actual infl ation over the year turned out to be 3 percent.