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22 August, 13:43

In which of the following situations would you prefer to be the borrower? (A) The interest rate is 4 percent and the expected inflation rate is 1 percent. (B) The interest rate is 25 percent and the expected inflation rate is 50 percent. (C) The interest rate is 9 percent and the expected inflation rate is 7 percent. (D) The interest rate is 13 percent and the expected inflation rate is 15 percent.

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  1. 22 August, 14:59
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    A. The interest rate is 4% and the expected inflation rate is 1%

    Explanation:

    The Fisher effect show us that we need the Real interest rate to evaluate the situations, and applying the balance

    "Real interest rate=Nominal interest rate-expected inflation rate"

    Our situation with the best Real interest rate is A (3%)
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