Question

In: Economics

Briefly explain in a paragraph or two why you would rather be a borrower during a...

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.

Solutions

Expert Solution

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.


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