Suppose Mike agrees to borrow $100 from Renee for one year at a one-time interest payment of 5%.They both expected the inflation rate to be 2% during the one-year period.However,during that year the inflation rate was actually 1%.Which of the following has occurred?
A) The unexpectedly low inflation rate has redistributed $1 from Mike to Renee
B) The unexpectedly low inflation rate has redistributed $5 from Mike to Renee
C) The unexpectedly high inflation rate has redistributed $1 from Mike to Renee
D) There have not been any redistribution costs to either party
E) The unexpectedly low inflation rate has redistributed $1 from Renee to Mike

Question

Quizplus · Accepted Answer

The unexpectedly low inflation rate means that the real interest rate was higher than expected, benefiting Renee, as she effectively received more value from the interest payment.

Suppose Mike Agrees to Borrow $100 from Renee for One