Answer to Question #32131 in Macroeconomics for kyron regis

Question #32131
If inflation is less than expected, who benefits—debtors or creditors? Explain
Expert's answer
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.

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!


No comments. Be first!

Leave a comment

Ask Your question

New on Blog