If inflation is higher than expected, in the case of a fixed interest rate loan, this helps borrowers (by reducing the real interest rate they pay)and hurts lenders (by reducing the real interest rate they receive).

Question

Quizplus · Accepted Answer

This is because the fixed interest rate on the loan is set based on the expected inflation rate. If inflation is higher than expected, the real interest rate (i.e. nominal interest rate - inflation rate) that borrowers pay is lower than what they had planned for, making it easier for them to repay the loan. On the other hand, lenders receive a lower real interest rate, reducing the value of their returns.

If Inflation Is Higher Than Expected, in the Case of a Fixed