Unexpected disinflation will cause the real interest rate to be greater than the equilibrium rate,which will benefit lenders and harm borrowers.

Question

Quizplus · Accepted Answer

Disinflation refers to a decrease in the rate of inflation, which may lead to a decrease in nominal interest rates. However, if the decrease in inflation is unexpected, the real interest rate (which is the nominal interest rate minus inflation) may be greater than the equilibrium rate, which is the real interest rate at which the demand for borrowing equals the supply of saving. In this case, lenders will benefit because they will earn a higher real return on their savings, while borrowers will be harmed because they will have to pay a higher real cost of borrowing.

Unexpected Disinflation Will Cause the Real Interest Rate to Be