Suppose That You Borrow $50,000 from the Bank to Purchase
Suppose that you borrow $50,000 from the bank to purchase some land and you agree to pay 2 percent interest on the loan. If the loan must be repaid in 12 months and the inflation rate is 4 percent during the year, then
A) you will repay the bank with dollars with more purchasing power than you initially borrowed.
B) you will repay the bank with fewer dollars than the bank initially loaned you.
C) you will repay the bank with dollars with less purchasing power than it initially loaned you.
D) the bank will receive fewer dollars, because of inflation, than it had initially expected to receive.
The real rate of interest is defined as
B) the nominal rate of interest.
C) the nominal rate of interest minus the anticipated inflation rate.
D) the nominal rate of interest plus the anticipated inflation rate.
The annual rate of inflation averaged 2 percent during the past decade, but borrowers and lenders anticipate that the price level will rise at a rate of 3 percent next year. The current nominal interest rate is 7 percent. The real rate of interest is
A) 10 percent.
B) 9 percent.
C) 5 percent.
D) 4 percent.
Assume you borrow funds to buy a new car at 3 percent interest and you think that the economy-wide rate of inflation over the life of the loan will be 2 percent. If you are correct in your assumption, your real rate of interest on the car loan will be
A) 1 percent.
B) 2 percent.
C) 3 percent.
D) 5 percent.