GATE Civil Engineering
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Nominal interest rate is defined as the amount paid by the borrower to the lender for using the borrowed amount for a specific period of time. Real interest rate calculated on the basis of actual value (inflation-adjusted), is approximately equal to the difference between nominal rate and expected rate of inflation in the economy.

Which of the following assertions is best supported by the above information?

  1. Under high inflation, real interest rate is low and borrowers get benefited
  2. Under low inflation, real interest rate is high and borrowers get benefited
  3. Under high inflation, real interest rate is low and lenders get benefited
  4. Under low inflation, real interest rate is low and borrowers get benefited
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Real interest rate calculated on the basis of actual value (inflation-adjusted), is approximately equal to the difference between nominal rate and expected rate of inflation in the economy

This means, when inflation is high real interest rate is low (we can assume nominal rate is fixed as the time of borrowing based on an expected inflation rate). So, this must benefit the borrower. He pays the same amount of money to the lender but the value of that money has gone down.

Correct option: A.

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