Julio borrows $250 from Ricky. Ricky wants to make a 5% real ...

[ericka1]

Question 1

Drew wants to borrow $500 from Bob. Bob wants to make 4% real return on his money, so they both agree on an 4% interest rate paid next year. Both don't anticipate the -5% inflation next year. In this case

◦ Drew will pay an 4% real interest rate.
◦ Bob is better off.
◦ Drew will pay an 13% nominal interest rate.
◦ All of these.

Question 2

Julio borrows $250 from Ricky. Ricky wants to make a 5% real return on his money, so they both agree on a 5% interest rate paid next year. Both don't anticipate the 5% inflation next year. In this case

◦ Ricky is better off.
◦ Julio will pay $15 a year from now on.
◦ Julio is better off.
◦ Ricky will receive more than 5% of real rate of return a year from now.

[cat123]

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[ericka1]

Thank you!

[cat123]

Always glad to help...