When the real interest rate is less than zero, then:
A)a creditor will gain purchasing power.
B)a creditor will just break even on his or her real loan return.
C)a creditor will lose purchasing power.
D)a creditor will benefit from inflation.
E)a creditor's purchasing power will not be affected, because the nominal interest rate is greater than zero.

Question

Quizplus · Accepted Answer

When the real interest rate is less than zero, it means that the nominal interest rate is lower than the inflation rate. In this scenario, a creditor who has lent money at a fixed nominal interest rate will actually lose purchasing power because inflation will erode the value of the money repaid. Therefore, choice C is correct.

When the Real Interest Rate Is Less Than Zero, Then