In: Economics
Briefly explain in a paragraph or two why you would rather be a borrower during a period of unexpected rising inflation, and a lender during a period of unexpected declining inflation.
The answer comes down to asking an interesting question "Is
Inflation bad always for everybody?" It is not so.
In fact, borrowers are the kind of people who reap the benefits of
inflation to the fullest and every borrower gets an opportunity to
rejoice in times of inflation. Since inflation refers to general
rise in price and opposite of rising prices is value of money. It
is safe to say that anybody would rather be a borrower during a
period of unexpected inflation because due to reduction in the
value of money because of rise in prices helps the borrower to pay
back the less value that s/he had originally borrowed. Hence
lenders are in loss during the period of inflation.
On the other hand, the lenders are generally the type to be
satisfied in the time of declining inflation as it would mean that
there would be getting a value more than what they lent since there
is decrease in prices. Hence, borrowers might suffer and lenders
benefit during declining inflation.