If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 10% and inflation turns out to be 7% over the life of the loan,then the borrower _________ and the lender ________.

Question

Quizplus · Accepted Answer

When inflation turns out to be lower than expected, the purchasing power of money increases. As a borrower, the individual has to pay back the loan amount with interest at the agreed upon rate, which is now relatively higher than the actual inflation rate. Therefore, the borrower loses as they have to pay back more money than they would have with the actual inflation rate. On the other hand, the lender gains as they receive a higher return on the loan than they would have with the actual inflation rate.

If a Borrower and Lender Agree to an Interest Rate