When borrowing money to purchase an automobile,Raul has the choice between a fixed nominal interest rate or adjustable nominal interest rate loan.Typically the adjustable rate loans start with a lower rate than the fixed rate loans.Given that,under what circumstances would Raul most likely want to borrow money at the higher fixed rate?
A) When he expects the inflation rate to rise
B) When he expects the inflation rate to decrease
C) When he expects the inflation rate to remain unchanged
D) When he expects the price level to remain stable
E) When he expects the government to act to lower the inflation rate

Question

Quizplus · Accepted Answer

When Raul expects the inflation rate to rise, a fixed nominal interest rate loan would be a better choice because the interest rate remains constant throughout the loan term. In contrast, an adjustable nominal interest rate loan's interest rate fluctuates with market conditions and inflation rate changes, leading to higher interest payments in the future. Therefore, if Raul expects inflation to rise, he would benefit from locking in the lower fixed nominal interest rate, even if it initially seems higher than the variable rate option.

When Borrowing Money to Purchase an Automobile,Raul Has the Choice