If borrowers and lenders agree on a nominal interest rate and inflation turns out to be less than they had expected,
A) Neither borrowers nor lenders will gain because the nominal interest rate has been fixed by contract.
B) The interest rate will rise
C) Borrowers will gain at the expense of lenders.
D) Lenders will gain at the expense of borrowers.

Question

Quizplus · Accepted Answer

When inflation is lower than expected, the real interest rate is higher than anticipated, benefiting lenders who receive more in real terms, while borrowers pay more in real terms than they planned.

If Borrowers and Lenders Agree on a Nominal Interest Rate