If you were a lender, which of the following unexpected changes in inflation would you prefer once you have issued a long term fixed rate loan?
A)An increase from 2% inflation to 6% inflation.
B)An increase from 7% inflation to 10% inflation.
C)A decrease from 14% inflation to 8% inflation.
D)A decrease from 6% inflation to 3%.

Question

If you were a lender, which of the following unexpected changes in inflation would you prefer once you have issued a long term fixed rate loan?
A)​An increase from 2% inflation to 6% inflation.
B)​An increase from 7% inflation to 10% inflation.
C)​A decrease from 14% inflation to 8% inflation.
D)​A decrease from 6% inflation to 3%.

Quizplus · Accepted Answer

As a lender, a decrease in inflation would be preferable as it would mean that the purchasing power of the money being repaid would be increasing over time. Option C is the best choice as it represents a significant decrease in inflation, which would result in a greater increase in the real value of the money being repaid than the other options. Additionally, the decrease in inflation from 14% to 8% is a more substantial change than the decrease from 6% to 3%, which is the only other option that represents a decrease in inflation. The increases in inflation in options A and B are both undesirable for a lender as it would mean that the real value of the money being repaid would be decreasing over time.

If You Were a Lender, Which of the Following Unexpected