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In: Economics

Does unanticipated inflation hurt borrowers or lenders more? Explain why this is the case.

Does unanticipated inflation hurt borrowers or lenders more? Explain why this is the case.

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Expert Solution

Lenders are hurt by unanticipated inflation. This happens because the money they loaned out Now has less purchasing power due to unanticipated inflation.

Suppose a lender gives a borrower $100 at 5 percent interest rate per annum and adds 2 percent for inflation.

Suppose there is No unanticipated change in inflation, the lender will get back $107.

If there is unanticipated inflation of 1 percent, now the value of the sum loaned out is $106 only. This means a faIl in profit for lenders.

Borrowers benefits from unanticipated inflation.

Rahul Sunny answered 2 years ago
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