Scenario 2: Andy borrows money from Jack with an interest rate of 3 percent, but there is an unexpected inflation rate of -5percent. What is the real interest rate? Real Interest Rate=square % -square % Real Interest Rate=??? Calculate Rate Who benefits from the unexpected inflation rate: the borrower (Andy) or the lender (Jack)? A. Borrower (Andy) B. Lender (Jack)

Question

Scenario 2: Andy borrows money from Jack with an interest rate of 3 percent, but there is an unexpected inflation rate of -5percent. What is the real interest rate? Real Interest Rate=square % -square % Real Interest Rate=??? Calculate Rate Who benefits from the unexpected inflation rate: the borrower (Andy) or the lender (Jack)? A. Borrower (Andy) B. Lender (Jack)

Answer 1

1. The real interest rate is 8%.2. A. Borrower (Andy)

Answer 2

## Step 1The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In this case, the nominal interest rate is 3% and the inflation rate is -5%.### **Real Interest Rate = Nominal Interest Rate - Inflation Rate**## Step 2Substitute the given values into the formula.### **Real Interest Rate = 3% - (-5%)**## Step 3Calculate the real interest rate.### **Real Interest Rate = 3% + 5% = 8%**## Step 4The real interest rate is 8%.## Step 5Inflation erodes the value of money over time. When inflation is negative, it means that the purchasing power of money is increasing, which is beneficial to the borrower. In this case, Andy, the borrower, benefits from the unexpected inflation rate.

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