Essay
Loretta agrees to lend Ted $500,000 to buy computers for his consulting firm.They agree to a nominal interest rate of 8%.Both expect the inflation rate to be 2%.
(a)Calculate the expected real interest rate.
(b)If inflation turns out to be 3% over the life of the loan,what is the real interest rate? Who gains from unexpectedly high inflation,Loretta or Ted?
(c)If inflation turns out to be 1% over the life of the loan,what is the real interest rate? Who gains from unexpectedly low inflation,Loretta or Ted?
Correct Answer:
Verified
(a)8% - 2% = 6%.
(b)8% - 3% = 5%.Ted gai...View Answer
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Correct Answer:
Verified
(b)8% - 3% = 5%.Ted gai...
View Answer
Unlock this answer now
Get Access to more Verified Answers free of charge
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