Suppose That Anticipated Inflation Is 4% for the Coming Year

question 22

Multiple Choice

Suppose that anticipated inflation is 4% for the coming year, with loan contracts set at 7% with the expectation of a 3% return after inflation. If the actual inflation rate at the end of the year is 2%:

• A) creditors gain at the expense of debtors.
• B) people on a fixed income see the purchasing power of their incomes rising.
• C) debtors gain at the expense of creditors.
• D) there is a redistribution of income from creditors to debtors.

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Definitions:

Cost Method

An accounting approach used to account for investments, where the investment is recorded at its cost and adjustments are made for dividends received or possible impairments.

Note Disclosure

An explanatory or descriptive information included within financial statements, usually providing details about the basis of preparation, accounting policies, and specifics of certain account balances.

Capitalize

The accounting practice of recording a cost or expense on the balance sheet for the purposes of delaying full recognition of the expense over time through depreciation or amortization.

Depreciate

To allocate the cost of a tangible asset over its useful life, reflecting the decline in the asset's value due to use and wear and tear.