If borrowers and lenders agree on a nominal interest rate and inflation turns out to be less than they had expected ?
Correct answer: D. lenders will gain at the expense of borrowers
- A. neither borrowers nor lenders will gain because the nominal interest rate has been fixed by contract
- B. None of these answers
- C. borrowers will gain at the expense of lenders
- D. lenders will gain at the expense of borrowers
Explanation
With the nominal rate fixed, lower-than-expected inflation makes the real interest rate higher than anticipated. Borrowers must repay money with greater purchasing power, so lenders gain at borrowers’ expense.
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