If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out to be 2 percent, then the realized real interest rate is _____than the expected real interest rate and borrowers______relative to lenders.
A)less; gain
B)less; lose
C)greater; gain
D)greater; lose

Question

If the expected inflation rate is 4 percent, the nominal interest rate is 6 percent, and the actual inflation rate turns out  to be 2 percent, then the realized real interest rate is _____than the expected real interest rate and borrowers______relative to lenders. 
A)less; gain
B)less; lose
C)greater; gain
D)greater; lose

Quizplus · Accepted Answer

The expected real interest rate is the nominal rate minus the expected inflation rate (6% - 4% = 2%). The realized real interest rate is the nominal rate minus the actual inflation rate (6% - 2% = 4%). Since 4% is greater than 2%, the realized real interest rate is greater than the expected real interest rate, and borrowers lose relative to lenders because they pay more in real terms than expected.

If the Expected Inflation Rate Is 4 Percent, the Nominal