Answer
a) The real interest rate on the loan is lower than expected. As an example, if the nominal interest rate is 7%, and inflation is 2%, the real interest rate is 5%.
b) The borrower gains, and the lender loses.
Work Step by Step
c) Homeowners who borrowed during the 1960s were made better as their real interest rate was lower than their nominal interest rate (or the real interest rate may have been negative). Banks who loaned during the 1960s were made worse off (as they loaned during periods of low interest rates in a time of high interest rates).
