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Negative inflation rates benefit lenders because
a. the real interest rate is negative.
b. the real interest rate is positive.
c. the nominal interest rate is positive.
d. the nominal interest rate is negative.

Ask by Guerrero Summers. in the United States
Mar 21,2025

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When there’s negative inflation (deflation), the real interest rate becomes positive, benefiting lenders. So, the correct answer is:
b. the real interest rate is positive.

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Answering this question involves looking at how inflation affects interest rates. When inflation rates are negative, it signifies deflation. In this scenario, if the nominal interest rate remains positive, it can lead to a situation where the real interest rate (nominal rate minus inflation rate) becomes negative. This benefits lenders because they are effectively getting paid back with money that is worth more in the future than when it was borrowed.
One common mistake people make is thinking that lower inflation always leads to benefits for borrowers. While it may seem advantageous, lenders prefer a stable or mildly positive inflation environment to ensure that the purchasing power of their repayments is maintained or increased. Remember, money today is worth more than the same nominal amount in the future!

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