Final answer:
The borrower gained at the lender's expense because of the difference in the actual inflation rate and the expected inflation rate. When the loan was made, both parties expected the inflation rate to be 6 percent. However, the actual inflation rate turned out to be only 2 percent. This means that the borrower benefited from the lower inflation rate as it reduced the real interest rate on the loan.
Step-by-step explanation:
The borrower gained at the lender's expense because of the difference in the actual inflation rate and the expected inflation rate. When the loan was made, both parties expected the inflation rate to be 6 percent. However, the actual inflation rate turned out to be only 2 percent. This means that the borrower benefited from the lower inflation rate as it reduced the real interest rate on the loan.
The real interest rate is the nominal interest rate minus the rate of inflation. In this case, the nominal interest rate was 10 percent and the expected inflation rate was 6 percent. So, the expected real interest rate was 4 percent.
However, with the actual inflation rate of 2 percent, the real interest rate turned out to be 8 percent. Since the borrower was repaying the loan, a higher real interest rate would have been disadvantageous. Thus, the borrower gained at the lender's expense.
In general, when the actual inflation rate is lower than the expected inflation rate, the borrower benefits from a lower real interest rate, while the lender loses out on the expected return. On the other hand, if the actual inflation rate exceeds the expected inflation rate, the lender benefits from a higher real interest rate, while the borrower suffers from higher repayment costs.