Suppose that a borrower and a lender agree on thenominal interest rate to be paid on a loan. Theninflation turns out to be higher than they bothexpected.a. Is the real interest rate on this loan higher or lowerthan expected?b. Does the lender gain or lose from thisunexpectedly high inflation? Does the borrowergain or lose?c. Inflation during the 1970s was much higher thanmost people had expected when the decade began.How did this unexpectedly high inflation affecthomeowners who obtained fixed-rate mortgagesduring the 1960s? How did it affect the banks thatlent the money
Suppose that a borrower and a lender agree on thenominal interest rate to be paid on a loan. Theninflation turns out to be higher than they bothexpected.a. Is the real interest rate on this loan higher or lowerthan expected?b. Does the lender gain or lose from thisunexpectedly high inflation? Does the borrowergain or lose?c. Inflation during the 1970s was much higher thanmost people had expected when the decade began.How did this unexpectedly high inflation affecthomeowners who obtained fixed-rate mortgagesduring the 1960s? How did it affect the banks thatlent the money
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Suppose that a borrower and a lender agree on the
nominal interest rate to be paid on a loan. Then
inflation turns out to be higher than they both
expected.
a. Is the real interest rate on this loan higher or lower
than expected?
b. Does the lender gain or lose from this
unexpectedly high inflation? Does the borrower
gain or lose?
c. Inflation during the 1970s was much higher than
most people had expected when the decade began.
How did this unexpectedly high inflation affect
homeowners who obtained fixed-rate mortgages
during the 1960s? How did it affect the banks that
lent the money
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