Question

Explain how debtors loose from inflation, and the significance of anticipated vs. unanticipated inflation.

Answer 1

During periods of rising prices, debtors gain and creditors lose. When prices rise, the value of money falls. Though debtors return the same amount of money, but they pay less in terms of goods and services. This is because the value of money is less than when they borrowed the money.

Anticipated inflation is an expected, predicted, steady long-term increase in general price levels. Unanticipated inflation, on the other hand, is an unstable variable inflation in the general price level that was not predicted or expected. Unanticipated inflation can be higher than anticipated inflation or lower.