It's important to know how to calculate the real interest rate so that you can determine the real cost of borrowing money. After reading each scenario, calculate the real interest rate. Assume that the loans described below were made when the inflation rate was 1 percent.then the inflation rate unexpectedly changed. For each case, identify whether the unexpected inflation benefits the borrower or the lender. Scenario 1: Andy borrows money from Jack with an interest rate of 3 percent, but there is an unexpected inflation rate of 10 percent. 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)

## Step 1<br />The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. The formula for the real interest rate is:<br />### \(Real\ Interest\ Rate = Nominal\ Interest\ Rate - Inflation\ Rate\)<br />## Step 2<br />In this scenario, Andy borrows money from Jack with a nominal interest rate of 3 percent, but there is an unexpected inflation rate of 10 percent. We substitute these values into the formula:<br />### \(Real\ Interest\ Rate = 3\% - 10\%\)<br />## Step 3<br />The real interest rate is negative, which means that the inflation rate is higher than the nominal interest rate. This indicates that the borrower, Andy, benefits from the unexpected inflation rate because the real cost of borrowing is less than the nominal interest rate.