Parks Promotions, Inc. is able to borrow at an interest rate of 11 percent for one year. During that year, market participants expect 6 percent inflation.
a. What approximate real rate of return does the lender expect?
b. If inflation proves to be 4 percent for the year, does the lender suffer? Does the borrower suffer?
c. If inflation proves to be 8 percent, who gains and who loses?