Real interest rates at times have been negative. Why would anyone lending money agree to a negative real interest rate?
What will be an ideal response?
The lender did not agree to a negative real interest rate, instead unanticipated inflation occurred. If the actual inflation rate exceeds the anticipated inflation rate, the actual real interest rate received by lenders and paid by borrowers can end up negative.
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Which of the following is true of deficit spending and government debt?
a. The opportunity costs of government spending must be incurred today and cannot be passed on through deficit spending. b. Because of the national debt, future generations will incur liabilities without any corresponding benefits. c. Financing government spending with debt allows the government to pass the opportunity costs of government spending along to future generations. d. All of the public debt is owed to foreigners because the people who pay taxes are U.S. citizens.
Suppose a loan of $100 is made at a fixed nominal interest rate of 5% for one year. During the year, there is unexpected inflation of 7%. Which of the following is true?
a) The inflation has redistributed income from the lender to the borrower b) The real rate of interest is 12% c) The borrower will be obligated to repay $107 instead of $105 d) The real rate of interest is 2% e) None of the above