Final answer:
In an inflationary economy, heavy use of long-term debt may be beneficial as the real value of the debt decreases, allowing borrowers to repay in 'cheaper' dollars, meaning they pay back less in real terms than when the debt was incurred. This is advantageous for borrowers but not for lenders, as the latter receive repayment in less valuable dollars.
Step-by-step explanation:
In an inflationary economy, heavy use of long-term debt may be deemed beneficial for several reasons. The core concept here is that when you take out a loan with a fixed interest rate, you are agreeing to pay back the borrowed amount with money that has a certain purchasing power. During inflation, the value of money declines over time, meaning that the actual purchasing power of the dollars used to repay the debt diminishes.
Specifically, the option that explains why heavy use of long-term debt may be beneficial in an inflationary economy is the debt may be repaid in 'cheaper' dollars. This refers to the phenomenon where, as inflation rises, the real value of the debt falls, meaning each dollar used to repay the debt is less valuable than when the debt was incurred. This dynamic can be favorable for the borrower, as they end up paying less in real terms than initially expected. On the flip side, those who provide capital (the lenders) may receive repayment in dollars that are worth less than they were at the time of lending, making inflation unfavorable for them.
Additionally, entities like a state government may benefit from inflation as they see increases in tax revenues, which often go up naturally due to higher prices and nominal incomes, while repaying debts in less valuable dollars than those with which they originally funded expenses.