You borrow $10,000 today at a nominal rate of 5 percent; inflation for the past 10 years has been exactly 2 percent.Today,inflation instantly rises to 7 percent and stays that way for the duration of your loan.Based on the above information,ceteris paribus (all else equal) ,today
A) the real rate of interest on your loan is 14 percent.
B) the real rate of interest on your loan was previously 10 percent and is now 35 percent.
C) the real rate of interest on your loan is now -2 percent.
D) you will pay the lender back exactly $9,500.
E) you will pay the lender back exactly $10,700.
Correct Answer:
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