Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The individual benefits because they repay the loan with money that is worth less than when they borrowed it.
B
The individual suffers losses as the value of their loan increases due to inflation.
C
The individual remains unaffected as the loan amount stays the same regardless of inflation.
D
The individual benefits because inflation leads to lower interest rates on existing loans.
Understanding the Answer
Let's break down why this is correct
Answer
When a person takes out a fixed-rate loan, they agree to pay back the same amount of money over time, regardless of changes in the economy. If inflation rises unexpectedly after they take the loan, the value of money decreases, meaning that the money they pay back in the future is worth less than when they borrowed it. For example, if someone borrowed $1,000 at a fixed interest rate, and later inflation makes that $1,000 feel like it has less purchasing power, they benefit because they are paying back the loan with cheaper dollars. This means that their overall cost of borrowing is lower in real terms, making it easier for them to repay the loan. Therefore, the impact of unexpected inflation is generally positive for borrowers with fixed-rate loans, as they end up paying less in real value.
Detailed Explanation
The person benefits from inflation. Other options are incorrect because Some might think that inflation makes the loan more expensive; It's a common belief that inflation doesn't change anything for loans.
Key Concepts
Unanticipated Inflation
Impact on Borrowers and Lenders
Real vs. Nominal Value
Topic
Unanticipated Inflation Effects
Difficulty
medium level question
Cognitive Level
understand
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