Question

Suppose that a borrower and a lender agree on the nominal
interest rate to be paid on a loan. Then inflation turns out to be
**lower** than they both expected.

**(1)** True or False: The real interest rate on
this loan is lower than expected.

The lender **(2)** gains/loses from this unexpected
**lower** inflation, and the borrower
**(3)** gains/loses under these circumstances.

Inflation during the 1970s was much higher than most people had expected when the decade began.

Homeowners who obtained fixed-rate mortgages during the 1960s
**(4)** were harmed by/benefited from the unexpected
higher inflation (with regard to their mortgages), and the banks
that made the mortgage loans **(5)** were
harmed/benfited?

Answer #1

Ans:

1) False

when the inflation is lower than expected, the real interest rate will be higher, since

real interest rate = Nominal interest rate - inflation.

2) Gains

In case of unexpected lower inflation the lender gains and the borrower loses.This is because real value of the loan increases due to lower inflation.

3) Loses

In case of unexpected lower inflation the lender gains and the borrower loses.This is because real value of the loan increases due to lower inflation.

4) Benefited

In case of higher inflation borrowers are benefited and lenders are harmed. This is because the money that the borrowers repay is now worth less than when they borrowed it.

5) Harmed

In case of higher inflation borrowers are benefited and lenders are harmed. This is because the money that the borrowers repay is now worth less than when they borrowed it.

When the actual inflation rate turns out to be greater than the
expected inflation rate, who gains—the borrower or the lender—and
who loses? Explain why.

Boris Borrower and Lynn Lender agree that Lynn will lend Boris
$10,000 and that Boris will repay the $10,000 with interest in one
year. They agree to a nominal interest rate of 8%, reflecting a
real interest rate of 3% on the loan and a commonly shared expected
inflation rate of 5% over the next year.
If the inflation rate is actually 6% over the next year, how
does that lower-than-expected inflation rate affect Boris and Lynn?
Who is better...

Given the nominal interest rate of 13% and the expected
inflation of 15%, then the value of the real interest rate is ___
?
2. With the real interest rate equal to 3% and the expected
inflation equal to 2%, then the value of the nominal interest rate
is___?
3. A lender prefers a (high or lower) real interest rate while a
borrower prefers a (higher or lower) real interest rate higher
lowreal interest rate.

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$10,000 and that Boris will repay the $10,000 with interest in one
year. They agree to a nominal interest rate of 8%, reflecting a
real interest rate of 3% on the loan and a commonly shared expected
inflation rate of 5% over the next year.
Assume that there is a fall of 2 percentage points in the
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Suppose Thad loans Alyssa $1000 for one year at 10% nominal
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Over the next year, the real interest rate is 2% and the
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A. What is the nominal interest rate on a one-year loan?
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If the interest rate on a loan is fixed at 6% over the course of
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the real interest rate is less than the nominal interest
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d. All of...

Pretend that you’re a money lender. The nominal amount of
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A twenty-year loan of $25000 is negotiated with the borrower
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portion representing principal into a sinking fund with an annual
effective interest rate of 4%. (This is the amount for replacement
capital). What is...

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