Question

Suppose that Bank of America is making a loan to Peter at an annual real interest rate of 7.5%. If it expects the rate of inflation during the loan period to be 2%, what interest rate (specified in the loan contract) will Bank of America charge Peter? If the actual inflation during the loan period turns out to be only 0.5%, will Peter be worse off or better off?

Answer 1

Paye This is binding Price coiling. Sometimes, Rice ceiling is very complese It case of Reut contról it doesn't simply benefit reuters at the expense of hard loods. As when peut is low, fondloads spent less money en house maintenance and other facility given to their Reuters. frence, It is not beneficial to implement the Reut ceiling Real Interest Rate = 7iryfice - Suflat, on Expected - 24. a Banks always charge or mention Nominal 1 Interest rate while forming a Contract Nominal Interest date - Real Panterest ratet - Expected Inflation i2 &qe 7.5t 27. Te 29.5%/ nominal Interest Rode therefore cominal Interest 97 alfwel guflation - Oisele 8 then Nominal Interest safe = % 9.5% Real Interest Rate - g-sy. 0.5% 17

Peter will be worse off as of Borsoning increases as tum out to be 015%. his deal cost auflation