When disinflation arises unexpectedly,the real interest rate will _____ the equilibrium rate,which will benefit _____.
A) exceed;lenders and harm borrowers
B) exceed;benefit borrowers and harm lenders
C) fall short of;lenders and harm borrowers
D) fall short of;borrowers and harm lenders

Question

Quizplus · Accepted Answer

When disinflation arises unexpectedly, the real interest rate (nominal interest rate minus inflation) increases because the actual inflation is lower than what was expected. This means the real interest rate exceeds the equilibrium rate. Lenders benefit because the real value of the repayments they receive is higher than anticipated, while borrowers are harmed because they have to pay back more in real terms than they expected.

When Disinflation Arises Unexpectedly,the Real Interest Rate Will _____ the Equilibrium