You borrow $10,000 today at a nominal rate of 5%; inflation for the past 10 years has been exactly 2%.Today,inflation instantly rises to 7% and stays that way for the duration of your loan.Based on the above information,ceteris paribus (all else equal),today:

Question

Quizplus · Accepted Answer

To calculate the real rate of interest, we need to subtract the inflation rate from the nominal rate. Therefore, the real rate of interest on the loan today is 5% - 7% = -2%. This means that the value of the loan is decreasing in real terms due to inflation, and the borrower is effectively paying back less than they borrowed. Choices A, B, D, and E are incorrect based on the given information.

You Borrow $10,000 Today at a Nominal Rate of 5%;