True or false;
1.Lenders gain when inflation is higher than expected.
2. Lenders lose when inflation is higher than expected
3. real interest rates will never go negative
4. loan contracts specify the nominal interest rate.
5. if inflation is higher than the nominal interest rate. the real interest rate is negative
1. False. Lenders typically lose when inflation is higher than expected. When inflation rises, the purchasing power of the money they receive from borrowers decreases. As a result, lenders receive back less in real terms than they initially lent.
2. True. Lenders lose when inflation is higher than expected. As mentioned earlier, inflation erodes the value of money over time, reducing the purchasing power of the amount they receive from borrowers.
3. False. Real interest rates can go negative. A real interest rate is the nominal interest rate minus the inflation rate. If the inflation rate exceeds the nominal interest rate, the real interest rate will be negative. This means that the inflation-adjusted return on an investment is lower than the nominal return.
4. True. Loan contracts generally specify the nominal interest rate. The nominal interest rate is the rate explicitly mentioned in the contract and does not account for inflation. Both lenders and borrowers agree upon this rate, which is used to determine the interest payments on the loan.
5. True. If inflation is higher than the nominal interest rate, the real interest rate is negative. The real interest rate represents the purchasing power of the interest earned on an investment after accounting for inflation. If inflation exceeds the nominal interest rate, it results in a negative real interest rate, which means the return is not sufficient to keep pace with inflation. This can lead to a decrease in the value of the investment in real terms.