Jack recently took out a loan from Diane at an interest rate of 5 percent. Diane

Question

Jack recently took out a loan from Diane at an interest rate of 5 percent. Diane expected this year's inflation rate to be 2 percent and the real interest rate to be 3 percent. The loan is due at the end of this year. Complete the table below, showing the real interest rate for each possible inflation rate. For each situation, determine whether the unexpected inflation level benefits Jack or Diane.

Instructions: Enter your answers as whole numbers.

This year's actual inflation rate (%) Actual real
interest rate (%) Who benefits?

  1 (Click to select)DianeJack   4 (Click to select)DianeJack   0 (Click to select)DianeJack –2 (Click to select)JackDiane

Explanation / Answer

This year's actual inflation rate (%) Actual real interest rate (%) Who benefits?   1 4 Diane   4 1 Jack   0 5 Both Diane and Jack –2 7 Diane

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