Question

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The interest rate is 13% while the expected inflation rate is 15%. Which of the following...

The interest rate is 13% while the expected inflation rate is 15%. Which of the following is true regarding this observation?

____

A)   The real interest rate is roughly 2%

B)   The lender earns 13% interest at the expense of the borrower from a loan

C)   The borrower is subsidized by the lender in a loan

D)   None of the above

Solutions

Expert Solution

When the interest rate is lower than the rate of inflation, then it would mean that the borrower would be compensated for borrowing.

it can be also said that when the rate of inflation, is higher than the rate of interest then borrower should be subsidised by the lender in a loan.

The real interest rate would be in negative and the lender would not be earning any rate of interest.

Correct answer is option (C)

jeff jeffy answered 2 years ago
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