Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Borrowers benefit as they repay loans with devalued money.
B
Lenders benefit because they receive higher interest returns.
C
Both borrowers and lenders are equally affected by inflation.
D
Borrowers lose out because their wages don't keep pace with inflation.
Understanding the Answer
Let's break down why this is correct
Answer
Unanticipated inflation affects borrowers and lenders in different ways. When inflation rises unexpectedly, the money borrowers repay is worth less than when they borrowed it. This means borrowers benefit because they pay back their loans with money that has less purchasing power, making their debt easier to manage. For example, if someone borrowed $1,000 when inflation was low and then repaid it after inflation increased, the $1,000 they repay buys fewer goods than it did before. On the other hand, lenders lose out because they receive payments that are worth less than they expected, reducing their overall returns.
Detailed Explanation
When inflation happens unexpectedly, money loses its value. Other options are incorrect because Some might think lenders gain from inflation because they get more money back; It's a common belief that both sides are equally affected.
Key Concepts
Unanticipated Inflation Effects
Economic Agents' Behavior
Real Value of Money
Topic
Unanticipated Inflation Effects
Difficulty
medium level question
Cognitive Level
understand
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