Henry and Ellen meet George, the banker, to work out the details of a loan. George, Ellen and Henry all expect that inflation will be 5 per cent over the term of the loan, and they agree on a nominal interest rate of 10 per cent. In actuality, the inflation rate is 8 per cent over the term of the loan.
a. What is the expected real interest rate?
b. What is the actual real interest rate?
c. Who benefits and who loses because of the unexpected inflation?

Question

Quizplus · Accepted Answer

The Answer of Henry and Ellen meet George, the banker, to work out the details of a loan. George, Ellen and Henry all expect that inflation will be 5 per cent over the term of the loan, and they agree on a nominal interest rate of 10 per cent. In actuality, the inflation rate is 8 per cent over the term of the loan.
a. What is the expected real interest rate?
b. What is the actual real interest rate?
c. Who benefits and who loses because of the unexpected inflation?

Henry and Ellen Meet George, the Banker, to Work Out