Suppose the Annual Rate of Inflation Has Been 3 Percent

question 183

Multiple Choice

Suppose the annual rate of inflation has been 3 percent during each of the last three years and that borrowers and lenders have come to expect this rate of inflation. If the inflation rate unexpectedly rises,

• A) borrowers gain at the expense of lenders.
• B) lenders will gain at the expense of borrowers.
• C) the real interest rate will exceed the nominal interest rate.
• D) there is no reason to expect that the inflation will help borrowers relative to lenders.

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