Under which of the following conditions would you prefer to be the lender ?
Correct answer: D. The nominal rate of interest is 5 percent and the inflation rate are 1 percent
- A. The nominal rate of interest is 15 percent and the inflation rate is 14 percent
- B. The nominal rate of interest is 20 percent and the inflation rate is 25 percent
- C. The nominal rate of interest is 12 percent and the inflation rate is 9 percent
- D. The nominal rate of interest is 5 percent and the inflation rate are 1 percent
Explanation
A lender prefers the highest real return, approximated by the nominal rate minus inflation. The real returns are 1%, -5%, 3%, and 4%, respectively, making option d best.
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