Assume that the real rate of interest is 5 percent and a lender charges a nominal interest rate of 15 percent. If a borrower expects that the rate of inflation next year will be 10 percent and the actual rate of inflation next year is 12 percent:
A. neither the borrower nor the lender benefits from inflation.
B. both the borrower and the lender lose from inflation.
C. the borrower benefits from inflation, while the lender loses from inflation.
D. the lender benefits from inflation, while the borrower loses from inflation.
Answer: C
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A) maximum; $2.00 B) maximum; $3.50 C) minimum; $2.00 D) minimum; $3.50
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a. more, so they can buy more. b. more, so they can buy less. c. less, so they can buy more. d. less, so they can buy less.
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