If inflation increases unexpectedly, then
A)borrowers pay a higher real interest rate than they expected.
B)lenders receive a lower real interest rate than they expected.
C)lenders gain and borrowers gain.
D)neither borrowers nor lenders lose.
E)borrowers gain from a higher than expected real interest rate.

Question

Quizplus · Accepted Answer

When inflation increases unexpectedly, the real value of money decreases, meaning the amount paid back by borrowers has less purchasing power than anticipated. This results in lenders receiving a lower real interest rate than they expected, as the money they get back buys less than planned.

If Inflation Increases Unexpectedly, Then