Economists forecast the following inflation rates for the next four years What inflation adjustment should be included in the interest rate on a four-year loan made today?

Question

Economists forecast the following inflation rates for the next four years  What inflation adjustment should be included in the interest rate on a four-year loan made today?

Quizplus · Accepted Answer

The inflation adjustment included in the interest rate on a four-year loan made today should be the average expected inflation rate over the life of the loan, which is 4.5%. Option A is incorrect because borrowers will still have to pay the inflation rate that is expected during the loan period. Option B is incorrect because it assumes that the lender can always lend out the money again at the same interest rate, which may not be the case. Option D is incorrect because it assumes the inflation rate will be higher than the forecasted average, and does not provide a specific reason for choosing 7%.

Economists Forecast the Following Inflation Rates for the Next Four