A bank makes a loan for 1 year.The nominal annual interest rate is 7.5%.The real rate is 4%.Over the course of the year,overall prices increase by 4%.This rate of inflation hurt the _____ because the actual rate of inflation was _____ than the anticipated rate.
A) borrower;lower
B) borrower;higher
C) lender;higher
D) lender;lower

Question

Quizplus · Accepted Answer

The lender is hurt because the actual inflation rate (4%) is higher than the anticipated rate, reducing the real return on the loan.

A Bank Makes a Loan for 1 Year