Question

Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be lower than they both expected. (1) True or False: The real interest rate on this loan is lower than expected. The lender (2) gains/loses from this unexpected lower inflation, and the borrower (3) gains/loses under these circumstances.

Answer 1

Answer:

1) False

when the inflation is lower than expected, the real interest rate will be higher, since

real interest rate = Nominal interest rate - inflation.

2) Gains

In case of unexpected lower inflation the lender gains and the borrower loses.This is because real value of the loan increases due to lower inflation.

3) Loses

In case of unexpected lower inflation the lender gains and the borrower loses.This is because real value of the loan increases due to lower inflation.

Answer 2

Answer: The real interest rates are lower than expected, the lender loses from the unexpected lower inflation and the borrower gains under these circumstances.

Explanation:

When inflation is higher than was expected, the real interest rate is lower than expected. ... Because the real interest rate is lower than was expected, the lender loses and the borrower gains. The borrower is repaying the loan with dollars that are worth less than was expected.