(Module 14) You have borrowed $2000 for one year to purchase furniture for your first apartment. The bank is offering you an interest rate of 5.5% and the expected rate of inflation is 2.5% for the next year. a. At the beginning of the year, what is the nominal rate of interest and what is the real rate of interest? b. Suppose the actual inflation rate is 2% over the next year. Once the loan has been repaid, what is the nominal rate of interest and the real rate of interest? c. In a borrowing agreement, who wins and loses when inflation is unexpectedly low? Explain how unexpectedly low inflation creates a transfer of purchasing power when money is borrowed and lent. (4 points)

(Module 14) You have borrowed $2000 for one year to purchase furniture for your first apartment. The bank is offering you an interest rate of 5.5% and the expected rate of inflation is 2.5% for the next year. a. At the beginning of the year, what is the nominal rate of interest and what is the real rate of interest? b. Suppose the actual inflation rate is 2% over the next year. Once the loan has been repaid, what is the nominal rate of interest and the real rate of interest? c. In a borrowing agreement, who wins and loses when inflation is unexpectedly low? Explain how unexpectedly low inflation creates a transfer of purchasing power when money is borrowed and lent. (4 points)

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter7: Unemployment And Inflation

Section: Chapter Questions

Problem 3.7P

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