Joe borrowed $300 from his friend Mike to buy a $300 bike. Joe agreed to pay Mike 5% interest rate to compensate him for not having use of his $300 for that year and to adjust for the 2% inflation in the past. That nominal interest rate would imply a 3% real interest rate on the loan. Suppose that over the year the inflation rate was 3%, rather than 2% rate Joe and Mike had expected. Who gains and who loses? How would your answer differ if the actual inflation rate over the year was 1%?

Question

anonymous · Answer

Umm..if the inflation rate was 3% rather than 2%..Joe would gain as he would technically have to pay lesser value of money....
If it was only 1% inflation...then Mike would gain as he would get extra 1 % of interest..
Understand?

goldrush18 · Answer

yes i do thank you very much