5.03B THANK YOU!

Question

Assume the economy is experiencing low and stable inflation, averaging 2% a year. Nadia loans her good friend Brett $12,000 to buy a car. Nadia and Brett agreed that he would repay the loan over the next 5 years at a 5% fixed interest rate. How would Nadia and Brett be affected if next year the inflation rate unexpectedly rises to 6%?

Answer 1

I'm assuming this is a winner or loser question,

If there is unexpected inflation then creditors (banks, lenders) lose. As the money being paid back has lower purchasing power. If there is unexpected inflation then borrowers win as they borrowed when interst rates were low and the money when borrowed had a higher purchasing power.