Under which one of the following situations would you be better off?
A) You have $10,000 in your savings account paying 5 percent per year and unanticipated inflation is 8 percent per year.
B) You have paid $500 for a $1,000 U.S. savings bond that matures in 10 years and unanticipated inflation is 10 percent per year.
C) You lend a friend $1,000 at 6 percent to be repaid in one year and unanticipated inflation is 7 percent during the year.
D) You borrowed $2,500 at 7 percent to pay for this year's college expenses and unanticipated inflation is 12 percent during the year.

Question

Quizplus · Accepted Answer

In option D, the real interest rate you're effectively paying is negative because the inflation rate (12%) is higher than the interest rate on the loan (7%). This means the value of the money you repay is less in real terms than the value of the money you borrowed.

Under Which One of the Following Situations Would You Be