When actual inflation exceeds expected inflation,
A) short-term borrowers benefit more than long-term borrowers.
B) long-term lenders benefit more than short-term lenders.
C) long-term borrowers benefit more than short-term borrowers.
D) there is no effect on borrowers or lenders.

Question

Quizplus · Accepted Answer

When actual inflation exceeds expected inflation, long-term borrowers benefit more than short-term borrowers because they are able to repay their debts with dollars that are worth less in the future. This reduces the real value of the debt they owe, which essentially means that they are paying back less in real terms than they borrowed. Short-term borrowers, on the other hand, do not have this advantage as they are required to repay their debts quickly, leaving less time for inflation to erode the real value of their debt.

When Actual Inflation Exceeds Expected Inflation