Question

Given the following 4 scenarios: • The contract interest rate was 3.5% and the expected inflation rate was 1.5%. • The contract interest rate was 5% and the expected inflation rate was 2%. • The contract interest rate was 7.5% and the expected inflation rate was 4%. • The contract interest rate was 9% and the expected inflation rate was 5%. and an ex post actual inflation rate of 4.75%, answer both of the following questions. A.) Indicate which scenario was expected to be best for the borrower and explain why it is best for the borrower. B.) Indicate which scenario would have been best for society and explain why it is best for society.

Answer 1