Question

1. Explain why you think that borrowers of money and lenders of money view inflation differently.
   1. How do borrowers normally react to high inflation rates?
   2. How do lenders normally react to high inflation rates?
   3. Discuss whether you feel that there are some positive (good) aspects to high inflation. If you don’t feel that there are any, explain why.

Answer 1

a. When inflation rate increases, and if the borrower owed money before inflation happened, inflation favors the borrower. This is because the creditor still owes the same sum of money, but now they have more money than before in their paycheck to pay off the debt.

b. Inflation helps borrowers to repay lenders with money that is valued less than it was when it was initially lent, which is one type of loss to lenders. Whereas as inflation causes higher costs, the demand for credit rises, which favor lenders.

c.

Inflation has a positive effect on the economy in the following ways: higher profits as manufacturers will sell at higher rates. Better Investment Returns as investors and businessmen are motivated to invest in successful activities. Increased output.

The most important positive consequence of long-term inflation in the economy is to prevent deflation. As others have pointed out, prices and wages tend to be sticky, particularly in the downward direction, which means that deflation will cause major fluctuations in the real economy.

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