Give reason if a society experiences unanticipated inflation

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

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