Suppose That at the Beginning of a Loan Contract, the Real

Multiple Choice

Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is currently 6%.If actual inflation turns out to be 7% over the loan contract period, then

A) borrowers gain 1% of the loan value.
B) lenders gain 1% of the loan value.
C) borrowers lose 3% of the loan value.
D) lenders gain 3% of the loan value.
E) lenders gain 2% of the loan value.