Author Question: In the 1970s, nominal interest rates in the United States were quite high, while real rates were ... (Read 48 times)

neverstopbelieb · **on:** Jun 30, 2018

In the 1970s, nominal interest rates in the United States were quite high, while real rates were extremely low.

Which group wins in this circumstance, lenders or borrowers? What might explain the willingness of the losers to accept disadvantageous loan terms?

Question 2

Changes in net worth and liquidity may significantly affect the volume of lending and economic activity according to the

A) interest rate channel.
B) balance sheet channel.
C) money channel.
D) bank lending channel.

bimper21 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Borrowers win when the real interest rate is low. The lenders' generosity is mostly because lending terms are based on expected inflation. If actual inflation turns out to be higher than expected, the real cost of borrowing is lower than had been expected. Also, most loans are made by financial institutions that are in the business of selling money. When expected inflation is high, some lenders might try to attract borrowers by offering a nominal interest rate that does not compensate fully for the expected inflation. That is, the lender accepts a lower real interest rate in order to increase its loan business.

Answer to Question 2

B