Consider the situations of a lender of money and a borrower of money.Which of the following situations is least burdensome for the borrower?
A)nominal interest rate of 15% and an inflation rate of 8%
B)nominal interest rate of 10% and an inflation rate of 1%
C)nominal interest rate of 8% and an inflation rate of 2%
D)nominal interest rate of 4% and an inflation rate of 4%
E)nominal interest rate of 29% and an inflation rate of 21%

Question

Quizplus · Accepted Answer

The real interest rate, which reflects the true cost of borrowing after adjusting for inflation, is calculated as the nominal interest rate minus the inflation rate. In option D, the real interest rate is 0% (4% nominal interest rate - 4% inflation rate), making it the least burdensome for the borrower.

Consider the Situations of a Lender of Money and a Borrower