Suppose that at the beginning of a loan contract,the real interest rate is 4% and expected inflation is currently 6%.If actual inflation turns out to be 7% over the loan contract period,then
A)borrowers gain 1% of the loan value.
B)lenders gain 1% of the loan value.
C)borrowers lose 3% of the loan value.
D)lenders gain 3% of the loan value.

Question

Quizplus · Accepted Answer

When actual inflation is higher than expected (7% instead of 6%), the real value of the money repaid is less than anticipated, benefiting borrowers by effectively reducing the real interest rate they pay.

Suppose That at the Beginning of a Loan Contract,the Real