Question

6. During the last tax year you lent money at a nominal rate of 6 percent. Actual inflation was 1 percent, but people had been expecting 1.5 percent . This difference between actual and expected inflation

   1. transferred wealth from the borrower to you and caused your after-tax real interest rate to be 0.5

      percentage points higher than what you had expected.

   2. transferred wealth from the borrower to you and caused your after-tax real interest rate to be more

      than 0.5 percentage points higher than what you had expected.

   3. transferred wealth from you to the borrower and caused your after-tax real interest rate to be 0.5

      percentage points lower than what you had expected.

   4. transferred wealth from you to the borrower and caused your after-tax real interest rate to be more

      than 0.5 percentage points lower than what you had expected.

Answer 1

Question :

Answer : When inflation decreases, borrowers win as the real value of money they receive increases.

The correct choice is, Transferred wealth from borrower to you and caused your after tax ral interest rate to be 0.5 percentage point higher than what you had expected