Borrowers:
A) gain from inflation, as the value of their debt decreases.
B) lose with inflation, as the value of their debt decreases.
C) gain from inflation, as the value of their debt increases.
D) lose with inflation, as the value of their debt increases.

Question

Quizplus · Accepted Answer

Borrowers benefit from inflation because as the general price level rises, the value of their outstanding debt decreases. For example, if a borrower takes out a loan for $10,000 and experiences a 2% inflation rate, the real (inflation-adjusted) value of the debt decreases to $9,800 at the end of the year, making it easier to pay back.