If inflation rises more than expected over the next year,
A) the short-term borrower benefits.
B) there is no effect on the borrower or lender since the rate is preset.
C) the lender gains purchasing power.
D) the short-term lender benefits.

Question

Quizplus · Accepted Answer

When inflation rises more than expected, the interest rates tend to rise as well. In this scenario, the short-term borrowers who had borrowed money at a fixed interest rate before the inflationary period would benefit from the lower real interest rates. This is because the nominal interest rates would remain the same, but the inflation-adjusted or real interest rates would decrease, making it easier for borrowers to repay their loans.

If Inflation Rises More Than Expected Over the Next Year