Unexpected inflation:
A) helps those on fixed incomes.
B) hurts borrowers and helps lenders.
C) helps borrowers and hurts lenders.
D) causes interest rates to decrease.

Question

Quizplus · Accepted Answer

Unexpected inflation helps borrowers because they are paying back loans with dollars that are worth less than the dollars they borrowed. On the other hand, lenders are hurt by unexpected inflation because the dollars they receive back are worth less than the dollars they initially lent out. Furthermore, unexpected inflation can cause interest rates to increase rather than decrease, as lenders may demand higher interest rates to account for the inflation risk. Finally, unexpected inflation does not help those on fixed incomes, as their purchasing power decreases when prices rise unexpectedly.

Unexpected Inflation