Consider the situations of a lender and a borrower of money.Which of the following situations is most advantageous to the lender?
A)inflation rate of 0% and a nominal interest rate of 2%
B)inflation rate of 2% and a nominal interest rate of 7.5%
C)inflation rate of -1% and a nominal interest rate of 3%
D)inflation rate of 2% and a nominal interest rate of 4%
E)inflation rate of 3% and a nominal interest rate of 7.5%

Question

Quizplus · Accepted Answer

The real interest rate can be roughly calculated as the nominal interest rate minus the inflation rate. In option B, this gives a real interest rate of 5.5% (7.5% - 2%), which is the highest among the options, making it the most advantageous situation for the lender.

Consider the Situations of a Lender and a Borrower of Money.Which