Explain why you would rather be a borrower during a period of unexpected rising inflation, and a lender during a period of unexpected declining inflation
What will be an ideal response?
The nominal interest rate includes a charge to compensate the lender for the loss in the purchasing power due to inflation. If inflation unexpectedly rises, the lender does not get compensated enough for the loss in purchasing power. Likewise the borrower pays too little to compensate the lender for inflation. So it is better to be a borrower in times of unexpected rising inflation.
When inflation unexpectedly falls, then the lender gets compensated too much for inflation. The borrower likewise pays too much for inflation. So it is better to be a lender rather than a borrower during a period of unexpected declining inflation.
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For a perfectly competitive firm,
a. P = AR at all levels of output b. P = AR at the profit-maximizing quantity only c. P > AR at all levels of output d. P < AR at the profit-maximizing quantity only e. P < AR at all levels of output
If consumers were originally willing to buy 500 units of a good at a price of $20 are now willing to buy 500 units of the same good at a price of $10, that change would be described as a decrease in demand
a. True b. False Indicate whether the statement is true or false
Stagflation may follow an inflationary boom
a. True b. False Indicate whether the statement is true or false
Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more expansionary monetary policy?
a. In the short run, the real rate of output will be unaffected, but in the long run, it will increase. b. In the short run, the real rate of output will increase, but in the long run, it will be unchanged. c. There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher. d. In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase.