An unanticipated decline in the price level increases the burden of debt on borrowing firms but does not raise the real value of borrowing firms' assets.The result is
A)that net worth in real terms declines.
B)that adverse selection and moral hazard problems are reduced.
C)an increase in the real net worth of the borrowing firm.
D)an increase in lending.

Question

Quizplus · Accepted Answer

Because the decline in the price level does not raise the real value of borrowing firms' assets, the debt burden increases in real terms, which leads to a decline in net worth in real terms.

An Unanticipated Decline in the Price Level Increases the Burden