Why are creditors harmed by unexpected inflation? a. Creditors receive lower nominal rates of interest when prices rise. b. Creditors are paid back with more valuable dollars. c. Creditors receive higher nominal rates of interest when prices rise. d. Creditors are paid back money with less spending power than when it was originally loaned out.

Question

Houston Norris

Business

16 January, 15:35

Why are creditors harmed by unexpected inflation? a. Creditors receive lower nominal rates of interest when prices rise. b. Creditors are paid back with more valuable dollars. c. Creditors receive higher nominal rates of interest when prices rise. d. Creditors are paid back money with less spending power than when it was originally loaned out.

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Bradley Novak · Answer 1

d. Creditors are paid back money with less spending power than when it was originally loaned out.

Explanation:

Creditors are the entities to whom people or firms owe money. Eg : If A owes money to B, B is A's creditor.

Inflation is the rise in price level. It implies the same money has less purchasing (spending) power, due to price rise.

Normal Inflation is accounted by the creditors as the interest, which is added to the principal value of loaned amount, at the time of repayment.

However, unexpected inflation : It implies that creditors are repaid back money in the time, when that money has less purchasing power than the time when it had been lent. And, this unexpected fall in value of money is not accommodated into the interest rates also (since it was unexpected)