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Suppose a bank makes a $1,000 loan to you at 5 percent interest when the expected and actual ...

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Suppose a bank makes a $1,000 loan to you at 5 percent interest when the expected and actual ...

Suppose a bank makes a $1,000 loan to you at 5 percent interest when the expected and actual inflation rate are zero percent. Before you pay back the $1,000 principal and $50 interest, the inflation rate increases to 10 percent. Does anyone lose from this situation?

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Nobody loses, because the terms were set before the inflation rate increased, and once the terms are set, inflation does not affect the situation.

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You lose, because the dollars that you have borrowed are worth more the higher the inflation rate.

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The banker loses, because you will be paying back the loan with dollars that are worth less than the dollars you borrowed.

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Both the banker and you lose, for the reasons in answers b and c.

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There is not enough information to answer the question.

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Economics

Edition: 12^th

Author: Arnold

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