Initial rate question?

Real Interest Rate Question?

• Suppose that a bank offers a loan with a nominal interest rate of 10% and the expected inflation rate in the economy equals 3%. The terms of the loan are not renegotiated, so the borrower has a guaranteed nominal interest rate of 10%. Suppose that the inflation rate unexpectedly falls from 3% to 2%. Which of the following will occur? A. The borrower benefits from a lower nominal interest rate. B. The lender benefits from a lower nominal interest rate. C. The lender benefits from a higher real interest rate. D. The lender and borrower are not affected because the nominal interest rate is fixed. E. The borrower benefits from a higher real interest rate.

• Answer:

  C is the answer.