Answer to Question #279718 in Macroeconomics for Ganesha

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 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 is total of real interest and inflation rate .Increase in rate can cause increase in nominal rate, given that there's no modification in real interest rates. The nominal rate (or cash interest rate) is that the proportion increase in cash you pay the investor for the utilization of the cash you borrowed.

If there's increase in inflation rate then investor who has given loan as per nominal rate are going to be unhappy as a real returns on the loans can decrease. If the loan is given on the real interest then modification in inflation rate won't build any distinction to investor or recipient.