You borrow $1,000 from a bank at 6% annual interest and promise to pay it back after a year. As you sign the loan documents, both you and the bank expect inflation to be 3% in the coming year. During the course of the year, however, the average price level rises by only 1%. What best describes this situation? Select one: a. Both you and the bank are better off because the inflation rate is less than the nominal interest rate but greater than zero. O b. The bank has gained at your expense because the real interest rate on the loan is higher than expected. O c. Neither you nor the bank has gained anything extra because the inflation rate is less than the nominal interest rate. O d. You have gained at the bank's expense because you can pay the bank back in inflated dollars.
You borrow $1,000 from a bank at 6% annual interest and promise to pay it back after a year. As you sign the loan documents, both you and the bank expect inflation to be 3% in the coming year. During the course of the year, however, the average price level rises by only 1%. What best describes this situation? Select one: a. Both you and the bank are better off because the inflation rate is less than the nominal interest rate but greater than zero. O b. The bank has gained at your expense because the real interest rate on the loan is higher than expected. O c. Neither you nor the bank has gained anything extra because the inflation rate is less than the nominal interest rate. O d. You have gained at the bank's expense because you can pay the bank back in inflated dollars.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You borrow $1,000 from a bank at
6% annual interest and promise to
pay it back after a year. As you sign
the loan documents, both you and
the bank expect inflation to be 3% in
the coming year. During the course
of the year, however, the average
price level rises by only 1%. What
best describes this situation?
Select one:
a. Both you and the bank are
better off because the inflation
rate is less than the nominal
interest rate but greater than
zero.
O b. The bank has gained at your
expense because the real
interest rate on the loan is higher
than expected.
c. Neither you nor the bank has
gained anything extra because
the inflation rate is less than the
nominal interest rate.
O d. You have gained at the bank's
expense because you can pay
the bank back in inflated dollars.
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