Suppose that

Suppose that you want to take out a loan and that your local bank wants to charge you an annual real interest rate equal to 5%. Assuming that the annualized expected rate of inflation over the life of the bond is 2%, determine the nominal interest rate that the bank will charge you. The bank will charge you a nominal interest rate of%. What happens if, over the life of the loan, actual inflation is 1.5%? If actual inflation turns out to be 1.5% (lower than expected 2%), the real cost of borrowing will be%. If the actual inflation turns out to be lower than the expected inflation, A. you will be worse off than originally planned, since the real cost of borrowing turned out to be higher. O B. you will be better off than originally planned, since the real cost of borrowing turned out to be lower. O C. you will be unaffected, since the actual inflation will have no impact on the nominal interest rate