Answer to Question #32131 in Macroeconomics for kyron regis

Question

If inflation is less than expected, who benefits—debtors or creditors? Explain

Answer 1

The creditors benefit if inflation is less than expected because it increases the real interest rate they get from the borrowers (the real value of the borrower's debt is increased).
We can explain this using the Fisher equation. Letting r denotes the real interest rate, i denotes the nominal interest rate that is fixed, and let n denotes the inflation rate, the equation is:
i = r + n
r = i - n
So creditors receive payments from debtors that have a higher real value than was expected.