In which of the following situations would you prefer to be borrowing? a) the interest rate…
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Question “In which of the following situations would you prefer to be borrowing? a) the interest rate…”
In which of the following situations would you prefer to be
borrowing?
a) the interest rate is 6% and the expected inflation rate is
6%
b) the interest rate is 5% and the expected inflation rate is
3%
c) the interest rate is 7% and the expected inflation rate is
13%
d) the interest rate is 11% and the expected inflation rate is
2%
Please explain. Thank you : )
Answer
If the interest rate on a loan is lower than the inflation rate, then we will create value.
Borrow: Inflation> Interest Rate
Reason:
1. Inflation is a rate at which prices rise faster than the amount that the individual has to pay in interest and principal. 2. This means that we will have less purchasing power.
3. Inflation can make financing more expensive, and vice versa.
A) The interest rate is 6%, and the expected inflation rate of 6%.
Can you Borrow or Not Borrow? Inflation= Interest Rate
b) The interest rate is 5%, and the expected inflation rate of 3%
Do not borrow for: Inflation Interest rate.
c) The interest rate is 7%, and the expected inflation rate of 13%
Can I Borrow? Inflation rate
d) The interest rate is 11%, and the expected inflation rate of 2%
Do not borrow for: Inflation Interest rate.
Conclusion
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