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Question i
Hamilton meets Adams, the banker, to work out the details of a 5-year loan. They both expect that inflation will be 3 percent over the term of the loan, and they agree on a nominal interest rate of 5 percent. As it turns out, the inflation rate is 2 percent over the term of the loan.

Q 51

Question 51

What was the expected real interest rate, in percentage terms?

Answer:

Q 52

Question 52

What was the actual real interest rate, in percentage turns out?

Answer:

Q 53

Question 53

Who benefited and who lost because of the unexpected inflation?

Answer 1

ANSWERS:

Question 51

What was the expected real interest rate, in percentage terms?

• real interest rate = nominal interest rate − inflation rate.

Nominal interest rate = 5%, inflation rate = 3%

The expected real interest rate = 5% - 3%= 2%

Question 52

What was the actual real interest rate, in percentage turns out?

• real interest rate = nominal interest rate − expected inflation rate.

Nominal interest rate = 5%, expected inflation rate = 2%

The actual real interest rate = 5% -2% = 3%

Question 53

Who benefited and who lost because of the unexpected inflation?

The lender is supposed to be the one who should be benefiting from this transaction,because Then the real interest rate is higher than anticipated that is 3 percent instead of 2 percent which benefits the lender but is costly to the borrower with regard to the inflationchange.An nominal interest rate is a payment on a loan, and its typically set when the loan is first made.If a jump in inflation catches the borrower and lender by surprise , the nominal interest rate they agreed on will fail to reflects the higher inflation .

CONCLUSION :

• A real interest rate is adjusted to remove the effects of inflation and gives the real rate of a bond or loan.
• A nominal interest rate refers to the interest rate before taking inflation into account.
• The inflation rate is the rate at which the general rise in the level of prices, goods and services in an economy occurs and how it affects the cost of living of those living in a particular country.
• To calculate the real interest rate, you need to subtract the actual or expected rate of inflation from the nominal interest rate.