Suppose you borrow $600 of principal that must be repaid at the end of two years, along with interest of 5 percent a year. If the annual inflation rate turns out to be 10 percent, (a) What is the rea

(a) The real rate of interest on the loan is -4%. Explanation: The real rate of interest is the nominal interest rate (5%) minus the inflation rate (10%). In this case, 5% - 10% = -5%. To get the real rate to the nearest whole number, we round down to -4%. (b) The real value of the principal repayment is $468.09. Explanation: The real value of the repayment is the nominal value (which is $600) adjusted for inflation. To calculate this, we divide the nominal value by (1 + inflation rate)^n, where n is the number of years. In this case, n is 2 years and the inflation rate is 10%, so the calculation is: $600 / (1 + 0.1)^2 = $468.09. We round this to the nearest two decimal places. (c) (A) The debtor loses. Explanation: The inflation rate is higher than the nominal interest rate, which means that the value of the borrowed money decreases more quickly than the interest can offset. This means that the debtor will have to pay back more money in real terms than they borrowed.