The reason that the expected inflation rate matters in determining the impact on borrowers or lenders is that

Question

Quizplus · Accepted Answer

The expected inflation rate matters in determining the impact on borrowers or lenders because interest rates typically depend on expected inflation, rather than actual inflation. This is because lenders and borrowers are concerned about inflation over the life of the loan, not just current inflation rates. Therefore, expected inflation rates are used to determine interest rates, which in turn affect borrowers and lenders. Higher expected inflation rates usually result in higher interest rates, which mean higher payments for borrowers and higher returns for lenders. Conversely, lower expected inflation rates often result in lower interest rates, which mean lower payments for borrowers and lower returns for lenders.

The Reason That the Expected Inflation Rate Matters in Determining