Who benefits from this unexpected decrease in inflation

Reference no: EM133377665

Question: Suppose you negotiate a one-year loan with a principal of $1000 and the nominal interest rate is currently 7%. You expect the inflation rate to be 3% over the next year. When you repay the principal plus interest at the end of the year, the actual inflation rate is 2.5%. Compute the real interest rate at the time you take out the loan and at the time you repay the loan. Who benefits from this unexpected decrease in inflation? Who loses?

Reference no: EM133377665

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