Macroeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 16

Jack recently took out a loan from Diane at an interest rate of 5 percent. Diane expected this year's inflation rate to be 2 percent and the real interest rate to be 3 percent. The loan is due at the end of this year. Complete Table 15P-3 ,showing the real interest rate for each possible inflation rate. For each situation, determine whether the unexpected inflation level benefits Jack or Diane.