Question

Determine if each statement is true or false. True False Answer Bank Borrowers gain when inflation is lower than expected, If inflation is higher than the nominal interest rate, the real interest rate is negative Loan contracts specify the nominal interest rate, Real interest rates will never go negative. Lenders gain when inflation is lower than expected,

Answer 1

1. Borrowers gain when the inflation lower than expected-

Borrowers are benefitted when the price level are increased faster than the expected (unanticipated inflation). At that time borrowers still owes the same amount of money, but now they have more money to pay-off their debt.

The statement is false

2. If the inflation is higher than the nominal interest rate the real interest rate is negative-

When the inflation is effectively higher than nominal interest rate, the real interest rate will be negative. It is seen during the deflationary period, when people holds money with them.

The Statement is true.

3. Loan contracts specify the nominal interest rate-

Nominal interest rate refers to the rate of interest before adjusting for inflation. It also refers to the rate specified in the loan contract without adjusting for compounding.

The statement is true

4. Real interest rate will never go negative-

If the inflation is effectively higher than the nominal interest rate real interest rate can be negative.

The statement is false

5. Lenders gain when the inflation is lower than expected-

Lenders are benefitted when the price level increases lower than the expected (unanticipated deflation). As it lowers the worth of asset and during deflation the lower limit will be zero. Lenders can’t lend at zero percent interest. A rate above zero lenders make money.

The statement is true.