Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Borrowers benefit as they repay with less valuable money, while savers lose purchasing power.
B
Borrowers lose because their debts increase in real terms, while savers gain from higher interest.
C
Both borrowers and savers are equally affected, facing the same level of loss in purchasing power.
D
Borrowers gain from fixed-rate loans, while savers are unaffected by inflation.
Understanding the Answer
Let's break down why this is correct
Answer
Unanticipated inflation occurs when prices rise unexpectedly, affecting how much money people have to spend. For borrowers, this situation can be beneficial because they repay their loans with money that is worth less than when they borrowed it. For example, if someone took a loan for $1,000 and inflation causes prices to rise, they can pay back that loan with dollars that have less purchasing power, making it easier for them. On the other hand, savers are hurt by unanticipated inflation because the money they saved loses value over time, meaning they can buy less with the same amount of money in the future. So, while borrowers gain from inflation, savers find their savings diminished in value.
Detailed Explanation
When inflation is higher than expected, money loses value. Other options are incorrect because This answer suggests that borrowers lose when inflation rises; This option claims both groups lose equally.
Key Concepts
Unanticipated Inflation
Impact on Economic Agents
Purchasing Power
Topic
Unanticipated Inflation Effects
Difficulty
medium level question
Cognitive Level
understand
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