Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases the real cost of borrowing, making it harder for businesses to plan budgets.
B
It decreases the nominal interest rates, benefiting borrowers in their planning.
C
It leads to increased purchasing power, allowing businesses to plan for expansion.
D
It creates uncertainty in future costs, complicating long-term business planning.
Understanding the Answer
Let's break down why this is correct
Answer
Unanticipated inflation can significantly impact borrowers because it changes the value of money over time. When inflation rises unexpectedly, the money that borrowers owe becomes less valuable in the future, which can be beneficial for them. For example, if a business borrows $1,000 at a fixed interest rate and inflation increases, the real value of that debt decreases, making it easier for the business to repay. However, this can also complicate business planning since expenses might rise rapidly, making it harder to predict costs and set prices accurately. Ultimately, while borrowers may benefit from lower real debt, they must also navigate the uncertainty that comes with fluctuating prices.
Detailed Explanation
Unanticipated inflation makes it hard to predict future costs. Other options are incorrect because Some might think that inflation increases borrowing costs; It's a common belief that inflation lowers interest rates.
Key Concepts
Borrowers
Business planning
Topic
Unanticipated Inflation Effects
Difficulty
medium level question
Cognitive Level
understand
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