Question

5) You take out a loan for $500 to be paid back in a year. Then, the economy begins to experience inflation. As someone who is in debt, does this inflation benefit you or hurt you? Explain. Would your answer change if instead of taking out the loan, you kept that $500 in your wallet over the course of the year.

Answer 1

Yes in case if i have borrowed $500 with some commitment about interest rate to be paid after a year. In this case if the economy experiences inflation the interest rate will rise for other loans of same characterisitc

Hence i would be paying low interest rate for same loan if i had taken after inflation in an economy

Therefore in this cas i am better off

Now if i had kept $500 in a wallet then time value of 500 will be reduced and hence purchasing power of 500 will be drastically reduced

Hence i am worse off in this case