If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7 percent and inflation turns out to be 10 percent over the life of the loan, then the borrower ________ and the lender ________.
A)gains; gains
B)gains; loses
C)is not affected; gains
D)loses; gains

Question

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7 percent and inflation turns out to be 10 percent over the life of the loan, then the borrower ________ and the lender ________.
A)gains; gains
B)gains; loses
C)is not affected; gains
D)loses; gains

Quizplus · Accepted Answer

In this case, there was unanticipated inflation of 3 percent. This worked to the advantage of the borrower who paid back dollars that were less valuable than the two parties expected at the signing of the contract.

If a Borrower and Lender Agree to an Interest Rate