Suppose that the expected inflation rate is 3 percent and the actual inflation rate is 6 percent. Then borrowers
A) and lenders are both better off.
B) are better off and lenders are worse off.
C) are worse off and lenders are better off.
D) and lenders are both worse off.

Question

Quizplus · Accepted Answer

When expected inflation is lower than actual inflation, borrowers benefit because they repay loans in dollars that are worth less than when they borrowed. Lenders, on the other hand, are hurt because they receive payments in dollars that have less purchasing power than they expected. Therefore, borrowers are better off and lenders are worse off in this scenario.

Suppose That the Expected Inflation Rate Is 3 Percent and the Actual