Question

Suppose the annual rate of inflation has been 3 percent during each of the last three years and that borrowers and lenders have come to expect this rate of inflation. If the inflation rate unexpectedly rises, __________.

Answer 1

Answer:

a.borrowers gain at the expense of lenders.

Explanation:

Suppose the annual rate of inflation has been 3 percent during each of the last three years and that borrowers and lenders have come to expect this rate of inflation. If the inflation rate unexpectedly rises, then borrowers gain at the expense of lenders.

As inflation increases, two things happen

1. The amount of interest paid to lenders technically becomes of smaller value and lenders are loosing while borrowers are paying lesser

2. As inflation sets in, wages are increased to compensate for inflation and since the borrower already owed money before the inflation occurred, now he or she has more money in his or her paycheck to pay off the debt.