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Explain why the exptected inflation rate is relevant to debtors and creditors. How does a higher-than-expected inflation rate affect the real interest rate that a borrower actually pays? Which party benefits when the inflation rate is higher than expeted?

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Elin Hessel
Elin HesselLv2
26 Dec 2018

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Related questions

If the inflation rate is higher than what was expected:

 

a. Debtors pay a higher real interest rate than they had anticipated.

 

b. Creditors receive a lower real interest rate than they had anticipated.

 

c. Debtors receive a higher real interest rate than they had anticipated.

 

d. Creditors pay a lower real interest rate than they had anticipated

 

Inflation affects creditors and debtors. Suppose the Canadiandebtors borrowed $100 from the Canadian creditors on December 31,1992 and promised to pay back $105 on December 31, 1993. This isequivalent to paying back a nominal interest rate of 5%.

1) Find the real interest rate, which is defined as real interestrate = nominal interest rate – inflation rate

2)Do the creditors gain or lose from this transaction? Explain
23. Shoe-leather costs refer to the costs of:
 
  the raw material used in production.
  the increased number of transactions as inflation increases.
  living adjustments as inflation increases.
  the raw material used in production, the increased number of transactions as inflation increases, and living adjustments as inflation increases.
24. Unit-of-account costs of inflation are the:
 
  costs associated with money being a less reliable unit of measurement.
  costs of transactions associated with avoiding the inflation tax.
  costs associated with businesses changing prices.
  transfers the government gets from printing money.
25. Menu costs of inflation are the:
 
  costs associated with money being a less reliable unit of measurement.
  costs of transactions associated with avoiding the inflation tax.
  costs associated with businesses changing prices.
  revenue the government gets from printing money.
26. Which statement is true?
 
  Unexpected inflation benefits lenders and hurts borrowers.
  Unexpected inflation benefits borrowers and hurts lenders.
  Unexpected inflation benefits borrowers but does not affect lenders.
  Unexpected deflation benefits lenders but does not affect borrowers.
27. Suppose that the nominal rate of interest is 7 percent and the inflation rate is 3 percent. The real rate of interest is equal to:
 
  3 percent.
  4 percent.
  10 percent.
  7 percent.
28. You have gone to the bank to borrow money for one year. The nominal annual interest rate is 7.5 percent. The real rate of interest is 4 percent. (Hint: what is the expected inflation rate?) Over the course of the year, overall prices increased by 3 percent. (Hint: What is the actual inflation rate?) This rate of inflation hurt the _____ because the actual rate of inflation was _____ than the anticipated rate of inflation.
 
  lender, higher
  lender, lower
  borrower, higher
  borrower, lower

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