Assume that the real rate of interest is 5 per cent and a lender charges a nominal interest rate of 15 per cent.If a borrower expects that the rate of inflation next year will be 10 per cent and the actual rate of inflation next year is 12 per cent:
A)neither the borrower nor the lender benefits from inflation.
B)both the borrower and the lender lose from inflation.
C)the borrower benefits from inflation, while the lender loses from inflation.
D)the lender benefits from inflation, while the borrower loses from inflation.
E)it is not possible to determine who gains or loses.

Question

Quizplus · Accepted Answer

The borrower benefits because the actual inflation rate (12%) is higher than expected (10%), reducing the real interest rate paid. The lender loses because the real return is lower than anticipated.

Assume That the Real Rate of Interest Is 5 Per