Question

Expected real rate of return = 3%,

Expected inflation rate = 2%,
An agreed upon nominal rate = 5%.
Case 1
History plays out and the actual inflation rate is 4%.
a-what is the actual real rate on the loan?
b-an economic idea here is you and the bank had an outcome different than
expected. In this sense, who had a gain and who has a loss, and in what sense
was the gain and the loss?
Case 2
History plays out and the actual inflation rate is 1%.
c-what is the actual real rate on the loan?
d-an economic idea here is you and the bank had an outcome different than
expected. In this sense, who had a gain and who has a loss, and in what sense
was the gain and the loss?

Answer 1

The actual real rate on the loan in Case 1 is 1%. The borrower gains and the bank incurs a loss. The actual real rate on the loan in Case 2 is 4%. The bank gains and the borrower incurs a loss.

Step-by-step explanation:

The actual real rate on the loan in case 1 can be calculated as:

Actual real rate = Nominal rate - Actual inflation rate

Actual real rate = 5% - 4% = 1%

In this case, the actual real rate on the loan is 1%.

In terms of gain and loss, the borrower gains because the actual real rate on the loan is lower than expected, while the bank incurs a loss because the actual real rate on the loan is lower than the agreed upon nominal rate.

In case 2, the actual real rate on the loan can be calculated as:

Actual real rate = Nominal rate - Actual inflation rate

Actual real rate = 5% - 1% = 4%

In this case, the actual real rate on the loan is 4%.

In terms of gain and loss, the bank gains because the actual real rate on the loan is higher than expected, while the borrower incurs a loss because the actual real rate on the loan is higher than the agreed upon nominal rate.