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GATE 2020 CE (CE2) – Question 6

General Aptitude · Analytical Aptitude: Logical Reasoning and Deduction · 2 marks · Multiple choice

Nominal interest is the amount a borrower pays a lender on borrowed money over a period. Inflation-adjusted real interest is approximately nominal interest minus expected inflation. Which assertion is best supported?

  1. Under high inflation, real interest is low and borrowers benefit.
  2. Under low inflation, real interest is high and borrowers benefit.
  3. Under high inflation, real interest is low and lenders benefit.
  4. Under low inflation, real interest is low and borrowers benefit.

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Show answer and explanation

Correct answer: (A) Under high inflation, real interest is low and borrowers benefit.

Explanation

At a fixed nominal rate,higher inflation lowers the real borrowing cost. This benefits borrowers and reduces lenders’ real return. **A** follows from the given approximate relationship. The other options reverse a direction or beneficiary.