ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.

Detailed explanation-2: -“Unexpected inflation hurts savers and people on fixed incomes; it helps people who have borrowed money at a fixed rate of interest.”

Detailed explanation-3: -Unexpected inflation leads to high-risk premiums and economic uncertainty. With higher uncertainty, lenders ask for a premium to compensate for the uncertainty. This leads to higher costs of borrowing, hence reducing economic activity because it discourages investments.

Detailed explanation-4: -For example, increased interest rates; if inflation is anticipated, banks can try and protect themselves by increasing the interest rates. Unanticipated inflation occurs when people do not know inflation is going to occur until after the general price level increases.