When real rates of interest are negative, borrowers:
A) benefit, because the value of their debt declines.
B) suffer, because the value of their debt declines.
C) benefit, because the value of their debt increases.
D) suffer, because the value of their debt increases.

Question

Quizplus · Accepted Answer

When real rates of interest are negative, the inflation rate is higher than the nominal interest rate, which means the value of money decreases over time. In this situation, borrowers benefit because the value of their debt declines in real terms. For example, if a borrower takes out a loan with a nominal interest rate of 4%, but the inflation rate is 5%, the real interest rate would be -1%. This means the borrower pays back their loan with money that is worth less than when they borrowed it.

When Real Rates of Interest Are Negative, Borrowers