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 lower than they both expected.

A) Is the real interest rate on this loan higher or lower than expected?

B) Use your own "made-up" figures for nominal interest rate, expected inflation rate and actual inflation rate to explain your answer in part "a"?

C) Does the lender gain or lose from this unexpectedly low inflation? Does the borrower gain or lose?

D) Inflation since the Global Financial Crisis (GFC) has been much lower than people expected it to be. How has this affected home-owners who obtained fixed rate mortgages in the mid -2000s?How did it affect the banks that lent them the money?

E) If you were taking a mortgage today, how would your expectations about inflation in next 10 years affect your decision about whether to fix your mortgage or let it vary?