If the real rate of interest is 4% and the expected inflation rate is 7%, a loan at 12%
A) would reward the lender at the borrower's expense
B) would reward the borrower at the lender's expense
C) would penalize the lender at the borrower's expense
D) none of the above

Question

Quizplus · Accepted Answer

The nominal interest rate is 12%, while the sum of the real interest rate (4%) and expected inflation rate (7%) is 11%. The lender is compensated with an additional 1% over the expected inflation, rewarding the lender.

If the Real Rate of Interest Is 4% and the Expected