Question

4. What is the value of the real interest rate in each of the following situations? a. The nominal interest rate is 15%, and the expected inflation rate is 13%. b. The nominal interest rate is 12%, and the expected inflation rate is 9%. c. The nominal interest rate is 10%, and the expected inflation rate is 9%. d. The nominal interest rate is 5%, and the expected inflation rate is 1%. e. In which of the above situations would you prefer to be the lender? Why? f. In which of the above situations would you prefer to be the borrower? Why?

Answer 1

Nominal Interest Rate (i) = Real Interest Rate & Rate of infintion (2) i= 154. = 12 . n = 134 T: 9.1. ) sa 2 - 3 f. ti a) b) 2) d) i= 104 i= st. = 9.f. ar- 1 t. a = 11. - 4./. Real interest in the cost of borrowing money. A borrower pays render, time value of money for wing lender's money. This cost for a losrowar will lee ligher an real interest is higher and will be lower and real interest is lower. opposite occurs for lender, de fare fors higher real interest rate , which means higher return on bin invested money e) lender - brigh n => f) borrower - wwr - 82 4.4. s-1.1.