Under which of the following conditions would you prefer to be the lender?
A) The nominal rate of interest is 15 per cent and the inflation rate is 14 per cent.
B) The nominal rate of interest is 20 per cent and the inflation rate is 25 per cent.
C) The nominal rate of interest is 12 per cent and the inflation rate is 9 per cent.
D) The nominal rate of interest is 5 per cent and the inflation rate is 1 per cent.

Question

Quizplus · Accepted Answer

In this scenario, the real rate of interest (nominal rate - inflation rate) is positive at 4%, which means the purchasing power of the lender's money is increasing over time. In the other scenarios, the inflation rate is either higher or close to the nominal rate of interest, which means the real rate of interest is negative or very low. This would result in the lender losing purchasing power over time, making it undesirable to be the lender.

Under Which of the Following Conditions Would You Prefer to Be