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Question
A student receives a five-year loan to pay for a $2,000 used car. The lender and the student agree to an 8% interest rate on a fixed-rate loan. Expected inflation was estimated to equal 2.5%, but unexpectedly decreases to 2%. Which of the following is true?A. The real interest rate decreased.
B. The student is made worse off because her real cost of borrowing is higher.
C. The lender is made worst off because his real return on the car loan is lower.
D. Both the student and the lender benefit.
Answer
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