ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The answer is b. Unexpected inflation benefits borrowers and hurts lenders. With unexpected inflation comes a decrease in the overall value of the dollar. It hurts lenders because the value of the money has decreased, lenders retain money that has little to no value in the market.

Detailed explanation-2: -Key takeaways 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-3: -Effect of Inflation on New Borrowers Again, during inflation, credit facilities with short tenures, such as credit card principal and personal loan, can be a little more cost-effective than loans with longer repayment periods. This is mainly because you borrow at a higher interest rate in times of inflation.

Detailed explanation-4: -“Unexpected inflation hurts savers and people on fixed incomes; it helps people who have borrowed money at a fixed rate of interest.”

Detailed explanation-5: -Which of the following are harmed by unexpectedly high rates of inflation? Savers who have put their money in long-term assets that pay a fixed interest rate.