Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It decreases the real value of their loans
B
It increases the cost of adjusting prices
C
It leads to higher interest rates for future loans
D
It has no significant effect on their profits
Understanding the Answer
Let's break down why this is correct
Answer
Unanticipated inflation mainly affects lenders because it decreases the real value of the money they get back when borrowers repay their loans. For example, if a lender gives a loan of $1,000 at a fixed interest rate of 5%, but inflation unexpectedly rises to 10%, the money they receive back will buy less than what it could have at the time of the loan. This happens because the purchasing power of the money decreases faster than expected, meaning lenders lose out on the value of their returns. Additionally, lenders may face menu costs, which are the expenses related to changing prices or interest rates in response to inflation, making it more difficult to adjust their strategies quickly. Overall, unanticipated inflation can lead to financial losses and increased uncertainty for lenders.
Detailed Explanation
Unanticipated inflation makes money worth less over time. Other options are incorrect because Some might think inflation raises costs for changing prices; It's a common belief that inflation leads to higher interest rates.
Key Concepts
Lenders
Menu costs
Demand-pull inflation.
Topic
Unanticipated Inflation Effects
Difficulty
hard level question
Cognitive Level
understand
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