Question

If the interest rate on a loan is fixed at 6% over the course of 10 years, and the rate of inflation is currently 2.5%, which of the following is NOT true?

the real interest rate is less than the nominal interest rate

the borrower bears the risk of higher inflation

the lender bears the risk of higher inflation

the nominal interest rate is 6% the real interest rate is 3.5%

Answer 1

Option D is not true, Because the value of real interest rate is depends on the Expected or actual inflation rate, for the current period this statement is True but for the rest it is false.

According to the Fisher equation/Effect, Real interest rate should always be less than Nominal interest rate give the positive inflation rate.

And rest two options are true and are depends on the value of inflation rate, because if inflation rate decreases it will going to hurt borrowers as they have to give money back which is more worthy then when they have borrowed from lender and vice a versa