Suppose the annual rate of inflation has been 3 percent during each of the last three years and that borrowers and lenders have come to expect this rate of inflation. If the inflation rate unexpectedly rises,
A) borrowers gain at the expense of lenders.
B) lenders will gain at the expense of borrowers.
C) the real interest rate will exceed the nominal interest rate.
D) there is no reason to expect that the inflation will help borrowers relative to lenders.

Question

Quizplus · Accepted Answer

When inflation unexpectedly rises, the real value of money repaid by borrowers is less than anticipated, benefiting borrowers at the expense of lenders.

Suppose the Annual Rate of Inflation Has Been 3 Percent