If a lender expects inflation to be 5 percent, and after a loan is made, actual inflation is 10 percent, which of the following will be true?
A) The lender will receive a lower real interest rate than he expected.
B) The loan will be repaid with dollars that are worth more than the lender expected.
C) The nominal rate of interest can be expected to fall in the future.
D) The lender will gain at the expense of the borrower.

Question

Quizplus · Accepted Answer

If actual inflation is higher than expected, the lender will receive a lower real interest rate than he expected because the nominal rate does not adjust for inflation. In other words, the lender will receive back dollars that are worth less than what he lent out.

If a Lender Expects Inflation to Be 5 Percent, and After