In which of the following situations would you prefer to be the lender?
A)The interest rate is 9 percent and the expected inflation rate is 7 percent.
B)The interest rate is 4 percent and the expected inflation rate is 1 percent.
C)The interest rate is 13 percent and the expected inflation rate is 15 percent.
D)The interest rate is 25 percent and the expected inflation rate is 50 percent.

Question

Quizplus · Accepted Answer

In Option B, the interest rate (4 percent) is higher than the expected inflation rate (1 percent). This means that the lender will earn a real return on their loan. In contrast, in all other options, the expected inflation rate is higher than the interest rate, meaning that the lender would actually lose purchasing power by lending money. Option B provides the best opportunity for the lender to earn a positive return on their investment.

In Which of the Following Situations Would You Prefer to Be