Question

Assume the economy is experiencing low and stable inflation, averaging 2% a year. Nadia loans her good friend Brett $12,000 to buy a car . Nadia and Brett agreed that he would repay the loan over the next 5 years at a 5% fixed interest rate. How would Nadia and Brett be affected if next year the inflation rate unexpectedly rises to 6%?

Answer 1

If next year the inflation rate unexpectedly rises to 6%, Nadia will be losing annually 1% of the capital that she loaned to Brett.

Given that the economy is experiencing low and stable inflation, averaging 2% a year, and Nadia loans her good friend Brett $ 12,000 to buy a car, and he would repay the loan over the next 5 years at a 5% fixed interest rate to determine how would Nadia and Brett be affected if next year the inflation rate unexpectedly rises to 6% the following calculation should be performed:

• Real interest = interest rate - inflation rate
• Interest pre inflationary increase = 5 - 2 = 3% per annum
• Interest post inflationary increase = 5 - 6 = -1% per annum

Thus, if next year the inflation rate unexpectedly rises to 6%, Nadia will be losing annually 1% of the capital that she loaned to Brett.

Learn more in https://brainly.com/question/13324776