If the expected inflation rate was 4 percent and the actual inflation rate was 6 percent, then
A)borrowers gained in real terms at the expense of lenders.
B)lenders gained in real terms at the expense of borrowers.
C)borrowers and lenders were not affected.
D)the government lost because it collected less in taxes.

Question

Quizplus · Accepted Answer

Borrowers gained in real terms because they borrowed money at a fixed nominal interest rate based on the expected inflation rate of 4 percent, but the actual inflation rate was higher at 6 percent. Therefore, they paid back their loans with money that was worth less in real terms than what they borrowed. Lenders, on the other hand, received fixed nominal interest payments which did not account for the higher inflation rate and, thus, lost out in real terms.

If the Expected Inflation Rate Was 4 Percent and the Actual