Question

Jack recently took out a loan from Diane at an interest rate of 4 percent. Diane expected this year’s inflation rate to be 1 percent and the real interest rate to be 3 percent. The loan is due at the end of this year. Complete the table below by computing the real interest rate for each possible inflation rate. For each situation, determine whether the unexpected inflation level benefits Jack or Diane.

Answer 1

The complete question has been added with an image for better understanding of the concept. The beneficiaries of the inflation and interest rates will be,

1. When inflation is 1 percent, Diane will benefit more than Jack;
2. When inflation is 0 percent; Diane will benefit more than Jack;
3. When inflation is 4 percent; Jack will benefit more than Diane;
4. When inflation is -2 percent; Diane will benefit more than Jack.

What is inflation?

A given increase in rates or prices of any commodity, including monies, over a particular financial period is known as inflation.

The rates and beneficiaries due to the unexpected change in inflation for the above situation is given attached in the image in the form of a table.

Hence, the significance of inflation is as mentioned.

Learn more about inflation here:

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