When inflation rises unexpectedly:
A) the real interest rate will exceed the equilibrium rate,which will benefit lenders and harm borrowers.
B) the real interest rate will exceed the equilibrium rate,which will benefit borrowers and harm lenders.
C) the real interest rate will fall short of the equilibrium rate,which will benefit lenders and harm borrowers.
D) the real interest rate will fall short of the equilibrium rate,which will benefit borrowers and harm lenders.

Question

Quizplus · Accepted Answer

When inflation rises unexpectedly, the real interest rate (the nominal interest rate minus inflation) effectively decreases. This situation benefits borrowers because they repay their loans with money that is worth less than expected. Conversely, lenders are harmed because the real value of the money they receive back is less than they anticipated.

When Inflation Rises Unexpectedly