If expected inflation is higher than actual inflation, then:
A) wealth will be redistributed from lenders to borrowers.
B) wealth will be redistributed from borrowers to lenders.
C) both borrowers and lenders will gain wealth.
D) both borrowers and lenders will lose wealth.

Question

Quizplus · Accepted Answer

If expected inflation is higher than actual inflation, lenders will have given money at a lower real value than they had anticipated, and, therefore, their wealth will be redistributed to the borrowers. Meanwhile, borrowers will benefit as they are paying back their loans with money that is worth less than what they initially borrowed. Therefore, wealth will be redistributed from borrowers to lenders.

If Expected Inflation Is Higher Than Actual Inflation, Then