Question

You borrow $1,000 for one year at 5% interest to buy a
couch. Although you did not anticipate any inflation,
there is unexpected inflation of 5% over the life of your
loan.
100.
a. What was the real interest rate on your loan?
b. Explain how you gained from the inflation.
c. Who lost as a result of the situation described?
Explain.

Answer 1

Answer:

Real interest rate on your loan was 0%.

Explanation:

You gained from inflation as you paid back the loan with dollars that were worth less than when you borrowed them. Lender lost as they received less valuable dollars in repayment than they lent out.