Given a fixed nominal interest rate on a loan, unanticipated deflation:
A)decreases the burden of paying off the loan.
B)increases the burden of paying off the loan.
C)does not alter the burden of paying off the loan.
D)has an indeterminate effect on the burden of paying off the loan.

Question

Given a fixed nominal interest rate on a loan, unanticipated deflation:
A)​decreases the burden of paying off the loan.
B)​increases the burden of paying off the loan.
C)​does not alter the burden of paying off the loan.
D)has an indeterminate effect on the burden of paying off the loan.

Quizplus · Accepted Answer

Unanticipated deflation increases the real value of money, meaning that the amount of money borrowed now has more purchasing power in the future. This makes the real burden of repaying the loan heavier for the borrower, as they have to pay back more in terms of real goods and services than they initially borrowed.

Given a Fixed Nominal Interest Rate on a Loan, Unanticipated