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?

Answer rating: 100% (QA)

The real interest rate at the time the loan is taken out is calculated as follows ... View the full answer