Asked by Brooke Myers on Apr 24, 2024
Verified
A lender need not be penalized by inflation if the
A) long-term rate of inflation is less than the short-term rate of inflation.
B) short-term rate of inflation is less than the long-term rate of inflation.
C) lender correctly anticipates inflation and increases the nominal interest rate accordingly.
D) inflation is unanticipated by both borrower and lender.
Lender
An individual, a financial institution, or a group that provides funds to others with the expectation that the funds will be repaid, typically with interest.
Inflation Rate
The rate at which the cost of goods and services rises within an economy over a specific period.
Nominal Interest
The rate of interest before adjustment for inflation, representing the face value of borrowed money and the income from lending investments.
- Understand the relationship between inflation rates and the impact on lenders and borrowers.
Verified Answer
DG
Denaya GlantonMay 02, 2024
Final Answer :
C
Explanation :
If a lender correctly anticipates inflation and increases the nominal interest rate accordingly, they can offset the impact of inflation and avoid being penalized. By increasing the nominal interest rate, the lender can ensure that the real interest rate remains positive and they continue to earn a return that reflects the time value of money. The other options do not necessarily protect the lender from the negative effects of inflation.
Learning Objectives
- Understand the relationship between inflation rates and the impact on lenders and borrowers.