Consider borrowers and lenders who agree to loans with fixed nominal interest rates. If inflation is higher than what the borrowers and lenders expected, then who benefits from lower real interest rates?

Question

Quizplus · Accepted Answer

When inflation is higher than expected, the real interest rate decreases, as the value of the money decreases and the real interest rate is the nominal interest rate minus inflation. This lower real interest rate benefits the borrowers, as they will be paying back the loan with less valuable money than they borrowed initially, while the lenders will receive less valuable money than expected. Therefore, only the borrowers benefit from lower real interest rates.

Consider Borrowers and Lenders Who Agree to Loans with Fixed