Chapter 29, Problem 5MCQ

To determine

Factors on which lenders and borrowers base their decisions.

Explanation of Solution

The difference between the nominal rate of interest as well as the inflation rate is the real interest rate. It is said that the real interest rate reveals the genuine cost of borrowing.

Increased price levels significantly impact borrowed funds. When the loan is repaid, the bank will not make any money if the rate of inflation is equal to the rate of interest. The borrower also obtains a loan with no interest.

Hence, the correct option is C.

Economics Concept Introduction

Introduction:

• Interest rates represent the cost of borrowing or the rate of return on savings, expressed as a percentage of the total amount of the loan or investment.

• Nominal interest rate is the addition of the real interest rate and the expected inflation rate.

• Real interest rates show the actual rate of return on loans (lenders) and bonds (investors).