Suppose you lend $1,000 at an interest rate of 10 percent over the next year.If the expected real interest rate at the beginning of the loan contract is 4 percent, then what rate of inflation over the upcoming year would be most beneficial to you as the lender? An inflation rate
A)less than 6 percent.
B)greater than 6 percent.
C)equal to 6 percent.
D)equal to 4 percent.

Question

Quizplus · Accepted Answer

A lower inflation rate would be most beneficial to the lender because it would allow for a higher real interest rate (the nominal interest rate minus the inflation rate). If inflation is less than 6 percent, the real interest rate would be higher than 6 percent (10 percent minus inflation rate), which is greater than the expected real interest rate of 4 percent. This means the lender would earn a higher return on their investment than initially expected.

Suppose You Lend $1,000 at an Interest Rate of 10