Advising on a Loan with Rising Inflation
Imagine you are advising a friend who is considering taking out a loan with a fixed nominal interest rate. Your friend has read news reports suggesting that the rate of inflation is expected to rise significantly over the next few years. Explain how this expected increase in inflation would affect the real cost of their loan, assuming the nominal interest rate on the loan does not change.
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An individual takes out a one-year loan for $10,000 at a fixed nominal interest rate of 5%. At the time the loan is made, both the borrower and the lender expect the annual inflation rate to be 2%. However, over the course of the year, the actual inflation rate turns out to be 6%. Which of the following statements accurately describes the outcome of this situation?
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An individual secures a one-year loan with a fixed nominal interest rate of 7%. At the time the loan is taken, the expected rate of inflation for the year is 3%. However, by the end of the year, the actual rate of inflation is 5%. The actual, or ex-post, real cost of borrowing for this individual turned out to be ____%.
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