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larisa86 [58]
3 years ago
10

Suppose the fixed interest rate on a loan is​ 5.75% and the rate of inflation is expected to be​ 4.25%. The real interest rate i

s​ 1.5%. Suppose now that instead of​ 4.25%, the inflation rate unexpectedly reaches​ 5.5%. Who gains and who loses from this unanticipated​ inflation? ​(Mark all that​ apply.)
Business
1 answer:
Alex3 years ago
8 0

Answer:

Lenders loose and borrowers gain

Explanation:

Whenever inflation increases the value of money falls and technically erodes interest rates (hence real interest rate falls although nominal rate stays the same)

In the scenario, if the inflation rate rises to 5.5%, then the real interest rate falls further from 1.5% to (5.75% - 5.5%) 0.25%, demonstrating that the lender is loosing further.

Contrarily, the borrower will technically be paying lesser interest to the lender because he will be paying lesser money in value to the lender both in terms of interest and principal

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With the purchase of the bonds, the money supply in the bank will increase.

<u>Explanation:</u>

Open market purchase strategy or method is a method that the government uses to control supply of money in the economy of a country. If the money supply increases in the economy, then the government sells the treasury bonds to the public to decrease money in hand and if money supply decreases then it buys bonds from public to increase the money in their hand so that they buy more products and the economy grows.

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Answer:

b

Explanation:

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