ACCA Applied Knowledge · Business and Technology · Macroeconomic factors
During a period of unexpected high inflation, which party is most likely to benefit?
A borrower with a long-term fixed-rate loan benefits most. Unexpected inflation erodes the real value of the debt, so repayments are made in money worth less. Fixed-rate lenders and pensioners on fixed money incomes lose purchasing power.
- AA lender who charged a fixed rate of interest on a long-term loan
- BA borrower who took out a long-term loan at a fixed rate of interestCorrect
- CA pensioner whose income is fixed in money terms
Explanation
Unexpected inflation reduces the real value of money, so the borrower repays the fixed debt with money worth less in real terms. The fixed-rate lender and the pensioner on a fixed money income both lose purchasing power.
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