Question
please help me better understand this question : MULTIPLE CHOICE: A firm owner Sally meets her banker, Tom, to work out the details of a
please help me better understand this question :
MULTIPLE CHOICE: A firm owner Sally meets her banker, Tom, to work out the details of a one-year loan. Both expect that inflation will be 3%, and they agree on a nominal interest rate of 6%. In reality, the inflation rate turns out to be 1%. Assuming there is no risk premium:
a. the expected real interest rate is 9% and the realized real interest rates is 4%.
b. the expected real interest rate is 9% and the realized real interest rates is 7%.
c. the expected real interest rate is 5% and the realized real interest rates is 3%.
d. the expected real interest rate is 4% and the realized real interest rates is 7%.
e. None of the above Identify the one best answer and provide a justification.
Also, explain who gains and who loses out of the loan given the unexpectedly higher inflation, and why
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