When unanticipated deﬂation occurs,
A) both creditors and debtors beneﬁt.
B) both creditors and debtors are hurt.
C) debtors are hurt, but creditors beneﬁt.
D) creditors are hurt, but debtors beneﬁt.

Question

Quizplus · Accepted Answer

When unanticipated deflation occurs, the value of money increases, which means that the value of debts also increases. This hurts debtors as they have to pay back more in real terms than what they borrowed. However, creditors benefit as they receive more in real terms than what they lent out. Therefore, option C, debtors are hurt, but creditors benefit, is the correct choice.

When Unanticipated Deﬂation Occurs