Answer to Question #224950 in Macroeconomics for rooba naz

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

If the inflation will be higher than expected and the loan is denominated in terms of the nominal interest rate which is the sum of real interest plus the inflation rate then I will be sad because I will repay more than what I expect to pay. However, if the loan is dominated in terms of real returns, I will be happy since real returns will be lower than nominal returns which do not subtract taxes and inflations.