Question

In what sense does inflation benefit and/or hurt the following:

lenders of money and borrowers of money?

If the interest rate was 6% on a loan, and inflation was 2% - which is hurt and which is helped and why?

How would your answer changes if the inflation rate was 9% instead of 2%? Explain your answer.

Answer 1

Borrowers again and lenders loose during inflation. Real Value of borrowed money decline with inflation but not the quantum, Hence, lenders lose and borrowers gain. The borrower is given dear money but repays the cheap money.

Real interest rate = Nominal ir - Inflation = 6-2 = 4%

In this case lenders gain since interest rate is more than inflation.

Real interest rate = Nominal ir - Inflation = 6-9 = -3%

In this case borrowers gain since interest rate is less than inflation.