Answer to Question #224401 in Macroeconomics for Zainab

Question

Suppose you make a loan of $100 that will be repaid to you in 1 year. If the loan is denominated in terms of a nominal interest rate, are you happy or sad if inflation is higher than expected during the year? What if the loan instead had been denominated in terms of a real return?

Answer 1

Nominal interest refer to sum of real interest and inflation rate. Increase in inflation rate will increase nominal interest rate real interest rate held constant.

The loan lender will be sad if inflation rate increases because return on loans will decrease.