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
Question
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
Solution
The likely outcome will be "borrowers will benefit and lenders will lose out".
Here's why:
-
The nominal interest rate is the rate of interest before taking inflation into account. It represents the rate of interest that is quoted on loans and investments.
-
If the anticipated rate of inflation is lower than the actual rate of inflation, the real interest rate (nominal interest rate - inflation) will be lower than what was initially expected.
-
Borrowers benefit from a lower real interest rate because the amount they have to pay back in real terms is less than what they initially borrowed. This is because the value of money decreases with higher inflation.
-
On the other hand, lenders lose out because the real value of the money they receive back is less than what they lent out due to the higher inflation.
So, in this scenario, borrowers will benefit and lenders will lose out.
Similar Questions
Imagine a scenario where the expected inflation rate is 4%, but the actual inflation rate turns out to be 1%. If the nominal interest rate remains unchanged, which statement is correct?a.Lenders will benefit, and borrowers will lose.b.Both borrowers and lenders will benefit.c.The ex post real interest rate is three percentage points lower than the ex ante real interest rate.d.Borrowers will benefit, and lenders will lose.
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.
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
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
This question does not follow from 22 e) above. This is an independent question. 22 f) Suppose that the monetary authority sets the real interest rate using the rule: r = 0.02 + 0.5 (π – π*), where π is the inflation rate and π* is the inflation target. Suppose that current inflation rate (π) is 6% (or 0.06) and the inflation target (π*) is 2% (or 0.02). What is the nominal interest rate? Write your answer in _______ %. For example, if 7%, just enter 7.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.