Your friend has just started a savings account that is currently paying 5% interest. If inflation is expected to be 7% this next year, your friend will be earning a

If inflation is expected to be 7% this next year, your friend will be earning a - 2% interest.

Step-by-step explanation:

Real interest rate is the interest rate that takes inflation into account. To calculate for the real interest rate, we have:

Real interest rate = nominal interest rate - inflation rate

Real interest rate = 5% - 7%

Real interest rate = - 2%

In this case, the borrower will get paid and your friend will be the one penalized.

Negative interest rates occur infrequently and usually only when a country's central bankers are forced to utilize the monetary policy tool - - where the interest rates are set below zero - - during harsh economic times.