Suppose that a borrower and a lender agree on the nominal interest rate to be paid on
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Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.
a. Is the real interest rate on this loan higher or lower than expected?
b. Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?
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Lets analyze the impact of unexpectedly high inflation on the real interest rate and the gains or losses for both the lender and the borrower a Real I...View the full answer
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