Question: Suppose two parties agree that the expected inflation rate for the next year is 3 percent. Based on this, they enter into a loan agreement

Suppose two parties agree that the expected inflation rate for the next year is 3 percent. Based on this, they enter into a loan agreement where the nominal interest rate to be charged is 7 percent. If inflation for the year turns out to be 2 percent, who gains and who loses?

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