If both the lender and borrower agree on an 8% interest rate, both expect a 4% inflation rate, and inflation turns out to be 4%, then _____ by the inflationGroup of answer choicesboth the borrower and lender are hurteither the borrower or the lender may be hurtthe borrower is hurt and the lender gainsneither the borrower nor the lender are hurtthe borrower gains and the lender is hurt
Question
If both the lender and borrower agree on an 8% interest rate, both expect a 4% inflation rate, and inflation turns out to be 4%, then _____ by the inflationGroup of answer choicesboth the borrower and lender are hurteither the borrower or the lender may be hurtthe borrower is hurt and the lender gainsneither the borrower nor the lender are hurtthe borrower gains and the lender is hurt
Solution
Neither the borrower nor the lender are hurt.
Here's why:
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The lender and borrower agreed on an 8% interest rate. This means the borrower will pay back the loan with this percentage of interest, and the lender will gain this as profit.
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Both parties expected a 4% inflation rate. Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
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If inflation turns out to be exactly as expected (4% in this case), then it doesn't change the real interest rate (the nominal interest rate adjusted for inflation).
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Therefore, the real profit for the lender and the real cost for the borrower remain as initially agreed, meaning neither party is hurt by the inflation.
Similar Questions
If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 10% and inflation turns out to be 7% over the life of the loan, then the borrower _____ and the lender ______. Group of answer choices gains; loses gains; gains is not affected; gains loses; gains loses; loses
If the borrower and lender agree to a loan at 8% when the inflation rate 3%, then 8% is the ________ interest rate and 5% is the _________ interest rate.
For a given nominal interest rate, if the anticipated rate of inflation is 3.5 per cent but the subsequent actual rate of inflation is 5.5 per cent, the likely outcome will be ___________. both borrowers and lenders will benefit borrowers will benefit and lenders will lose out borrowers will lose out and lenders will not be affected borrowers will lose out and lenders will benefit both borrowers and lenders will lose out
If borrowers and lenders anticipate that the rate of inflation will be 5%, but instead it turns out to be 3%, which of the following is likely to occur? a. Lenders wish that they had made fewer loans. b. Borrowers wish that they had borrowed more money. c. The real interest rate is higher than expected. d. Insufficient loans will have been made by lenders to maintain profit levels.
Suppose there an unexpected increase in inflation. Then:Group of answer choicesBorrowers and lenders are worse off by the same amountThere is a redistribution from lenders to borrowersBorrowers and lenders are better off by the same amountThere is a redistribution from borrowers to lenders
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