Reference: Ref 12-4 (Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts had fixed nominal interest rates of 10 percent and matured after one year. In which year given below did lenders gain relative to borrowers?
A) 2000
B) 2002
C) 2003
D) 2004

Question

Reference: Ref 12-4 (Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts had fixed nominal interest rates of 10 percent and matured after one year. In which year given below did lenders gain relative to borrowers?
A) 2000 
B) 2002 
C) 2003 
D) 2004

Quizplus · Accepted Answer

In 2003, the actual inflation rate was 15 percent, which was higher than the anticipated inflation rate of 7 percent. As a result, lenders gained relative to borrowers since the real interest rate (nominal rate - inflation rate) was lower than anticipated, leading to a decrease in the value of the money owed by borrowers.

Reference: Ref 12-4 (Table: Anticipating Inflation) Using the Inflation Data