You agree to lend $1,000 for one year at a nominal interest rate of 10%. You anticipate that inflation will be 4% over that year. If inflation is instead 3% over that year, which of the following is true?
A) The real interest rate you earn on your money is lower than you expected.
B) The purchasing power of the money that will be repaid to you will be lower than you expected.
C) The person who borrowed the $1,000 will be worse off as a result of the unanticipated decrease in inflation.
D) The real interest rate you earn on your money will be negative.
Answer: C
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