During the last tax year you lent money at a nominal rate of 6 percent.Actual inflation was 1 percent,but people had been expecting 1.5 percent .This difference between actual and expected inflation
A)transferred wealth from the borrower to you and caused your after-tax real interest rate to be 0.5 percentage points higher than what you had expected.
B)transferred wealth from the borrower to you and caused your after-tax real interest rate to be more than 0.5 percentage points higher than what you had expected.
C)transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5 percentage points lower than what you had expected.
D)transferred wealth from you to the borrower and caused your after-tax real interest rate to be more than 0.5 percentage points lower than what you had expected.

Question

Quizplus · Accepted Answer

The difference between actual and expected inflation means that the lender (you) earned a higher real interest rate than what the borrower had expected. This transfer of wealth from the borrower to you is equal to the difference between the nominal interest rate and the actual inflation rate, which is 6% - 1% = 5%. However, the after-tax real interest rate is lower due to taxes. The actual increase in after-tax real interest rate is equal to the nominal interest rate minus the inflation rate minus the tax rate. Assuming a tax rate of 30%, the after-tax real interest rate increase is 6% - 1% - 30% = 4.5%, which is 0.5% higher than what you had expected. Therefore, the correct answer is A.

During the Last Tax Year You Lent Money at a Nominal