Suppose the rate of inflation unexpectedly decreases from 7% to 4%. Which one of the following would most likely benefit from this unexpected reduction in the rate of inflation?
A) creditors.
B) a borrower whose loan has a fixed nominal interest rate.
C) debtors.
D) workers who are covered by a COLA agreement.

Question

Quizplus · Accepted Answer

Creditors benefit from a decrease in the rate of inflation when the loans they have given out have fixed nominal interest rates. This is because the real value of the repayments increases as the inflation rate decreases, making the money they receive back more valuable in terms of purchasing power.

Suppose the Rate of Inflation Unexpectedly Decreases from 7% to 4