Inflation affects creditors and debtors. Suppose the Canadian debtors borrowed $100 from the Canadian creditors on December 31, 1992 and promised to pay back $105 on December 31, 1993. This is equivalent to paying back a nominal interest rate of 5%.
a) Find the real interest rate, which is defined as real interest rate = nominal interest rate - inflation rate.
b)Do the creditors gain or lose from this transaction? Explain.
c)If the debtors want to borrow $100 again on December 31, 1993, what must be the minimum nominal interest rate that the debtors have to offer to pay the creditors on December 31, 1994, if your numerical answers above are known to everyone? Explain.