What is the actual real interest rate on the loan

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Reference no: EM13181160

I lend you a $1,000 today and you agree to pay me $1,100 one year from today. You are going to buy a computer with the $1,000 that your borrow from me. You anticipate that if you wait a year to buy the computer, its price will rise to $1,070. What is the nominal interest rate on this loan? What is the usual inflation rate? What real interest rate do the lender and borrower anticipate? Assume that the computer really costs $1,020 at the end of the year. What is the actual real interest rate on the loan? Would you have been less likely or extra likely to borrow the money if they had known the true inflation rate? Who was hurt by the fact that the actual inflation was not equal to the expected inflation rate, the lender or the borrower?

Reference no: EM13181160

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