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?
A. Under high inflation, real interest rate is low and borrowers get benefited.
B. Under low inflation, real interest rate is high and borrowers get benefited.
C. Under high inflation, real interest rate is low and lenders get benefited.
D. Under low inflation, real interest rate is high and lenders get benefited.
GATE 2020 · General Aptitude · Verbal Reasoning · medium
Answer: A. Under high inflation, real interest rate is low and borrowers get benefited.
Apply the formula to high inflation: Under HIGH inflation: expected inflation is large -> nominal rate - large inflation = LOW real rate. Example: nominal = 8%, inflation = 7% -> real rate = 1% (low).
Determine who benefits when real rate is low: When real interest rate is LOW, borrowers benefit. They repay debt with money that has depreciated in purchasing power. The real cost of their debt is lower than the nominal cost. Lenders, conversely, receive repayment in devalued money, so they lose out.
Evaluate all options and confirm A: A: High inflation -> low real rate -> borrowers benefit. CORRECT. B: Low inflation -> high real rate -> borrowers benefit. WRONG (high real rate hurts borrowers, helps lenders). C: High inflation -> low real rate -> lenders benefit. WRONG (lenders lose when real rate is low). D: Low inflation -> high real rate -> lenders benefit. TRUE in principle, but does not describe the assertion best supported by the passage's focus on borrowers vs lenders under high inflation. The passage is best matched by option A.