Suppose that anticipated inflation is 4% for the coming year, with loan contracts set at 7% with the expectation of a 3% return after inflation. If the actual inflation rate at the end of the year is 2%:
A) creditors gain at the expense of debtors.
B) people on a fixed income see the purchasing power of their incomes rising.
C) debtors gain at the expense of creditors.
D) there is a redistribution of income from creditors to debtors.

Question

Quizplus · Accepted Answer

When actual inflation is lower than anticipated, creditors gain because the real interest rate is higher than expected, increasing their return.

Suppose That Anticipated Inflation Is 4% for the Coming Year