Question

If the inflation rate unexpectedly rises:_______.a. borrowers gain at the expense of lenders.b. lenders will gain at the expense of borrowers.c. the real interest rate will exceed the nominal interest rate.d. there is no reason to expect that the inflation will help borrowers relative to lenders.

Answer 1

Answer:

a. borrowers gain at the expense of lenders

Explanation:

Inflation refers to the sustained increase of the price of a commodity over a period of time.

It can be caused due to increase in production cost or increased demand of a good or service.

The losers during inflation are the creditors because the money loaned out had more value or purchasing power compared to what is repaid. This is due to the fact the borrower will still owe the lender the same amount .

Answer 2

Answer:

A) borrowers gain at the expense of lenders.

Explanation:

The real interest rate that lenders earn = nominal interest rate - inflation rate. If the inflation rate increases, the real interest rate earned decreases.

The real interest rate that borrowers pay is also = nominal interest rate - inflation rate. If the inflation rate increases, the real interest rate paid decreases.

So, any increase in the inflation rate favors borrowers and hurts lenders.