Which of the following situations would you prefer if you planned to borrow money?
A)The nominal interest rate is 5 percent,and future prices are expected to be stable.
B)The nominal interest rate is 9 percent,and expected inflation is 7 percent.
C)The nominal interest rate is 4 percent,and expected inflation is 1 percent.
D)The nominal interest rate is 25 percent,and expected inflation is 22 percent.

Question

Quizplus · Accepted Answer

When borrowing money, you would prefer a situation where the real interest rate (nominal interest rate minus expected inflation) is the lowest. In option B, the real interest rate is 2% (9% nominal - 7% inflation), which is lower than the other options.

Which of the Following Situations Would You Prefer If You