GATE CE 2020 Set 2 — Question 6
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General Aptitude → Analytical Aptitude → Deduction & Induction
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Question
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?
Correct answer
(A) Under high inflation, real interest rate is low and borrowers get benefited.
Solution
The relationship provided is: Real Interest Rate Nominal Interest Rate - Inflation Rate.
1.When inflation is high, the difference (Nominal - Inflation) decreases, leading to a lower real interest rate.
2.A lower real interest rate means the borrower is effectively paying back less in terms of actual purchasing power than what was originally borrowed, which benefits the borrower.
3.Conversely, a high real interest rate (which occurs when inflation is low relative to the nominal rate) benefits the lender as the value of the repaid money is higher.
Assertion (A) correctly identifies that high inflation leads to a low real interest rate, which benefits the borrower.Continue learning with Success Tracker
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