Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be.The real interest rate she earns is
A)higher than she had expected,and the real value of the loan is higher than she had expected.
B)higher than she had expected,and the real value of the loan is lower than she had expected.
C)lower than she had expected,and the real value of the loan is higher than she had expected.
D)lower then she had expected,and the real value of the loan is lower than she had expected.

Question

Quizplus · Accepted Answer

When inflation turns out to be higher than expected, the real interest rate earned by the lender decreases, as the inflation erodes the value of the money repaid. Therefore, the real interest rate earned by Marta is lower than she had expected. Additionally, the real value of the loan is lower than she had expected since the inflation has caused the value of the money received back to be lower than when it was lent out.

Marta Lends Money at a Fixed Interest Rate and Then