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

Question

Quizplus · Accepted Answer

When the inflation rate (25%) is higher than the nominal interest rate (20%), the real interest rate is negative, meaning the borrower effectively pays back less in real terms.

Under Which of the Following Conditions Would You Prefer to Be