Question

Suppose you lend $1,000 at an interest rate of 10 percent over the next year. If the expected real interest rate at the beginning of the loan contract is 4 percent, then what rate of inflation over the upcoming year would be most beneficial to you as the lender? An inflation rate

Answer 1

Answer:

0%

Explanation:

Inflation rate shows a measure of rate at which the average price of a selected goods and services increases over time. It is usually expressed in percentage and shows how the strength of a currency is decreasing.

For the lender, if the inflation rate increases, the purchasing power of the interest the lender would have gotten would be small, the value of the money would have reduced therefore it would be better for the lender if the inflation rate is 0%

Answer 2

The inflation rate that would be most beneficial to the lender is a zero percent rate of inflation.

Inflation is the persistent rise in the price levels of a country. Inflation reduces the value of money and increases the price of goods and services.

Nominal interest rate is real interest rate plus inflation rate.

Nominal interest rate = real interest rate + inflation rate

Inflation rate = 10% - 4% = 6%

If inflation rate is 0, the 6% is extra income that accrues to the lender.

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