QUESTION 50 (5 marks)
A one-year loan has a nominal interest rate of 6%. Expected inflation at the start is 4%, but actual inflation over the year is 7%. Use the exact Fisher ratio, (1 + i)/(1 + inflation) − 1, to calculate expected and realised real interest rates. Explain who benefits from the unexpected inflation on a fixed nominal contract.
Practice marking scheme
Answer
Expected real rate: 1.92%; realised real rate: −0.93%; the borrower benefits relative to expectations.
Working
Expected: 1.06/1.04 − 1 = 0.0192308. Realised: 1.06/1.07 − 1 = −0.0093458. Unexpectedly high inflation reduces the purchasing power of the fixed repayment received by the lender. This favours the borrower relative to the anticipated outcome, holding nominal terms unchanged.
Marking criteria
- Calculates both exact real rates. [2 marks]
- States their signs and percentages correctly. [1 mark]
- Explains redistribution on a fixed nominal contract. [2 marks]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.