How are debtors and creditors affected when the economy unexpectedly goes from inflation to deflation?
A) Debtors and creditors would both have reduced real wealth.
B) Debtors and creditors would both have increased real wealth.
C) Debtors would gain at the expense of creditors.
D) Creditors would gain at the expense of debtors.

Question

Quizplus · Accepted Answer

During deflation, the value of money increases over time. This means that the amount of money debtors owe to creditors is worth more in terms of purchasing power when it's paid back than it was at the time of borrowing. Consequently, creditors gain because they receive money that has more purchasing power, while debtors lose because they have to pay back money that is worth more than when they borrowed it.

How Are Debtors and Creditors Affected When the Economy Unexpectedly