Author Question: Dean borrows $400 from Tim. Tim wants to make a 10% real return on his money, so they both agree on ... (Read 85 times)

fox · **on:** Apr 19, 2019

Question 1

Eliza wants to borrow $100 from Sandy. Sandy wants to make 4% real return on his money, so they both agree on a 4% interest rate paid next year. Eliza and Sandy did not anticipate any inflation, yet the actual inflation turned out to be -5% next year. In this case

◦ Eliza will pay an 9% real interest rate.
◦ Sandy is better off.
◦ Eliza will pay a 4% nominal interest rate.
◦ All of these.

Question 2

Dean borrows $400 from Tim. Tim wants to make a 10% real return on his money, so they both agree on a 10% interest rate paid next year. Dean and Tim did not anticipate any inflation, yet the actual inflation turned out to be 4% next year. In this case

◦ Tim is better off.
◦ Dean will pay $56 a year from now on.
◦ Dean is better off.
◦ Tim will receive more than 10% of real rate of return a year from now.

cloudre37 · **Reply #1 on:** Apr 19, 2019

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