Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will repay

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Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will repay the $10,000 with interest in one year. They agree to a nominal interest rate of 8%, reflecting a real interest rate of 3% on the loan and a commonly shared expected inflation rate of 5% over the next year.

a. If the inflation rate is actually 4% over the next year, how does that lower-than-expected inflation rate affect Boris and Lynn? Who is better off?

b. If the actual inflation rate is 7% over the next year, how does that affect Boris and Lynn? Who is better off?

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Macroeconomics

ISBN: 978-1319120054

3rd Canadian edition

Authors: Paul Krugman, Robin Wells, Iris Au, Jack Parkinson

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