Question

Suppose that anticipated inflation is 4% for the coming year, with loan contracts set at 7% with the expectation of a 3% return after inflation. If the actual inflation rate at the end of the year is 2%:

debtors gain at the expense of creditors.
people on a fixed income see the purchasing power of their incomes rising.
creditors gain at the expense of debtors.
there is a redistribution of income from creditors to debtors.

Answer 1

creditors gain at the expense of debtors.

Step-by-step explanation:

Answer 2

Creditors gain at the expense of debtors.

Explanation: Inflation is a macroeconomic measure that shows the general rise in the price level of goods and services in an economy,the price rise as a result of Inflation is above normal.

A CREDITOR is a person or an organisation who is owned a certain amount of money by another person or organisation known as A DEBTOR.

IN THE SCENERIO HIGHLIGHTED,THE CREDITORS WILL GAIN A RETURN ON INVESTMENT OF 5% INSTEAD OF THE ANTICIPATED 3%,THIS IS DUE TO THE REDUCED RATE OF INFLATION ANTICIPATED WHICH DROPPED FROM 4% TO 2%.

Anticipated Inflation=4%

Actual Inflation=2%

Anticipated Returns=3%

Loan contract interest rate based on anticipated Inflation=7%

Actual returns on investment=(4-2)%

=2%.

Actual returns=7%-2%

Actual returns=5%.