Question

In periods of unexpected inflation:

a.borrowers benefit, since they repay their loans in dollars whose real value has declined.

b.lenders benefit, since they are repaid in dollars whose real value has risen.

c.neither borrowers nor lenders are affected, since nominal interest rates stay the same.

d.lenders benefit, since nominal interest rates do not change.

Answer 1

In periods of unexpected inflation, borrowers benefit as they repay their loans in dollars whose real value has declined.

Step-by-step explanation:

When there is unexpected inflation, borrowers benefit since they repay their loans in dollars whose real value has declined. This means that the borrower effectively pays back less in real terms than they initially borrowed. For example, if someone borrows $10,000 with a fixed interest rate of 9% and the inflation rate rises to 9%, then the real interest rate on the loan becomes zero. This results in a benefit to the borrower as they are repaying the loan in dollars that are worth less due to inflation.