In which of the following situations would you prefer to be making a loan?
A) The interest rate is 9 percent and the expected inflation rate is 7 percent.
B) The interest rate is 4 percent and the expected inflation rate is 1 percent.
C) The interest rate is 13 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.

Question

Quizplus · Accepted Answer

Option B has a low interest rate and a low expected inflation rate, making it the best choice for making a loan. Option A has a high inflation rate, which reduces the real value of the loan. Option C and D have high-interest rates and very high inflation rates, making the loan very risky, and the repayment value may be much higher than the original loan amount.

In Which of the Following Situations Would You Prefer to Be