In periods of unexpected inflation:
A)borrowers benefit, since they repay their loans in dollars with lower real value.
B)lenders benefit, since they are repaid in dollars with a higher real value.
C)neither borrowers nor lenders are affected by the inflation rate, since their nominal interest rate stays the same.
D)lenders benefit, since the nominal interest rate does not change.

Question

Quizplus · Accepted Answer

In periods of unexpected inflation, borrowers benefit, since they repay their loans in dollars with lower real value. This is because inflation erodes the purchasing power of money over time, meaning that the same amount of money will buy fewer goods and services in the future than it can today. As a result, borrowers who took out loans at a fixed interest rate before the inflation occurred will effectively be repaying them with cheaper dollars, giving them an unexpected windfall. In contrast, lenders will earn less money in real terms, as the interest payments they receive will be worth less in purchasing power.

In Periods of Unexpected Inflation