Question

Consider a loan contract signed between a lender (e.g., a bank) and a borrower. Would the lender benefit or lose from inflation in the country? Explain your reasoning in a few sentences.

Answer 1

Answer -
Inflation is the rate of increase in general price level of goods and services without rise in income of the people.
The lender (i.e.bank) benifits from inflation when it expanding new finance. Because of inflation people need more credit for buying goods and services as their income level remains same in spite of rising prices.In this situation as people preferred to borrow money from banks .Higher amount of loans and advances benefits to banks for earning more interest.
For example,if the price of Air conditioner increases from $1500 to $1600 due to inflation the banks can earn more interest.,as 10% interest on $1600 is more than 10% interest on $ 1500.Thus lender can be benefited from inflation.