Suppose that the expected inflation rate is 8 percent and the actual inflation rate is 8 percent. Then borrowers
A) and lenders are both worse off.
B) and lenders are both better off.
C) are better off and lenders are worse off.
D) none of the above

Question

Quizplus · Accepted Answer

If the expected and actual inflation rates are the same, then borrowers and lenders are neither better off nor worse off. Borrowers will pay back loans with less valuable dollars, but they also borrowed money at a higher interest rate to account for the expected inflation. Similarly, lenders receive back money with less purchasing power, but they also charged a higher interest rate to account for the expected inflation. Overall, there is no net impact on either group.

Suppose That the Expected Inflation Rate Is 8 Percent and the Actual