Would an individual borrowing money at a time when inflation is high or when it is...

Would an individual borrowing money at a time when inflation is high or when it is low pay the higher interest rate? Why? What about an individual borrowing from another individual or the federal government? Why?

Expert Solution

An individual who is a borrower is benefited when there is inflation occuring after the borrowing is done. The rise in inflation causes the value of money to fall. The borrower quantitatively the same amount of money from the lender but must pay back money which is of lesser value as a result of inflation in market.

Individual borrowing from other individual rather than a more institutionalised body like federal government, is bound to face a higher rate of interest on the borrowing. High rate of inflation might cover or even rise the return value of money. While for a federal govt lending , the rate of interest is low. The borrower is expected to invest the money in order to boost the the Economy. To facilitate this , even a rising inflation is sign of growth and even low rate of return value for money, which is good for borrower. The govt can take upon other indirect measures in order to covere the value fall caused of rising inflation. The normal individual however can face Lower returns compared to value of lended money with interest , as a result of inflation.

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Rahul Sunny answered 8 months ago

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