Give reason if a society experiences unanticipated inflation

Assignment Help Microeconomics

Reference no: EM13184218

If I had a fixed 30-year mortgage and the economy experienced unanticipated inflation,the borrower would be the winner and the lender would be the loser in the given scenario. The reason being is if a society experiences unanticipated inflation, individuals and institutions will change their behavior. For example, potential homeowners will not be able to borrow from banks at fixed rates of interest, but will be required to accept loans whose rates can be adjusted as inflation rates change. Banks do not want to lend money at a fixed interest rate if there is a strong likelihood that inflation will erode the real value of the income stream they expected. However, if banks become reluctant to make loans with fixed interest rates, this imposes more risk on homeowners. In this scenario the fixed loan was made prior to the unexpected inflation sodebtors will gain at the expense of creditors. Creditors, on the one hand, will lose because inflation will erode the amount of money they planned to earn on the loans. Since the loans have already been made, there's nothing they can do about it. Debtors, on the other hand, will get a deal. It will be easier for them to repay their loans with inflated dollars.

Reference no: EM13184218

Questions Cloud

Respond if the inflation rate would rise naturally : The inflation rate would rise naturally as it always has the trick is to keep the supply of product as closely inline with consume needs. This can be done in many ways. If you see prices of a certain product climb you should look at ways to slow t..

Explain what was the final ph of the rxn : An enzyme reaction, in 2ml of 0.08 M of an acetate buffer, pH=4.76. During this reaction 2micromol H+ was produced

Global leadership development needs : Describe how smaller organizations can address their global leadership development needs. 150-200 words.

Psychological concept in the quote using correct terminology : Identify the psychological concept or concepts in the quote using correct terminology from the course. If the concept is closely associated with the writings of a particular theorist (such as Bandura, Erikson, Freud, Jung, Harlow, Kohlberg, Kubler-Ro..

Give reason if a society experiences unanticipated inflation : In this scenario the fixed loan was made prior to the unexpected inflation sodebtors will gain at the expense of creditors. Creditors, on the one hand, will lose because inflation will erode the amount of money they planned to earn on the loans. S..

Planning budget for may - prepare a flexible budget : During May, the company's activity was actually 105 diving-hours. Prepare a flexible budget for that level of activity - Puget Sound Divers is a company that provides diving services such as underwater ship repairs to clients in the Puget Sound area

State hydrochloic ac to form benzoic acid : In the reaction of sodium benzoate with hydrochloic ac to form benzoic acid, if 1.29 g of benzoic acid were formed, how many mmol of sodium

Find out the volume required to prepare solution : Determine the volume(mililiters) required to prepare 200.0ml of a 0.250M KNO3 solution from a 6.00M KNO3

Psychological concepts in quote using correct terminology : Identify the psychological concept or concepts in the quote using correct terminology from the course. If the concept is closely associated with the writings of a particular theorist (such as Bandura, Erikson, Freud, Jung, Harlow, Kohlberg, Kubler-Ro..

User Account

All Pages