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d) You have successfully secured a loan of worth $2,000,000 from the Bank. After the contract...

d) You have successfully secured a loan of worth $2,000,000 from the Bank. After the contract has been written, inflation in the economy turned out to lower than what was expected. Who gained and lost from this development? Explain.?

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Answer #1

At a constant nominal interest rate, if inflation decreases, then real rate of interest increases as a result of which in real terms or contant price levels, the person who got the loan pays more interest now as a result of which he's the one who actually loses from the decrease in inflation.

Because of increase in real interest, the bank recieves more in intereset at constant prices and that's the reason why the bank is the one who gains from it on the whole.

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