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 rise.
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 (2% instead of 4%), the real interest rate is higher than expected. Creditors receive more in real terms than they had planned, benefiting at the expense of debtors who have to pay more in real terms than they expected.

Suppose That Anticipated Inflation Is 4% for the Coming Year