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Bill wants to borrow $100 from John. John wants to make 6% real return on his money, so they both agree on a 6% interest
Bill wants to borrow $100 from John. John wants to make 6% real return on his money, so they both agree on a 6% interest rate paid next year. Neither anticipate the actual -2% inflation rate next year. In this case
Bill will pay 8% in real interest rate.
John is better off.
Bill will pay 6% in nominal interest rate.
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