I need Immidiate Help on this please?

Question

How does the anticipated rate of inflation affect market interest rates, and how does higher than expected inflation benefit borrowers?

Answer 1

Investors will want to , at least, keep. the real value of their money
If inflation is high AND peoples income increase at the inflation rate, the proportion of their income used to p[ay the loan decreases as does the value of their debt, in real terms.

Answer 2

We define inflation as the general rise in prices (and wages). Because prices have risen, a dollar won't buy as much as before.

If I lend you a dollar and you pay me just a dollar back, I will loose money!. So, if I anticipate inflation, I will raise my interest I charge you (answer to first question).

Now because inflation raises everyone's prices and wages, your income rises, and if you have a business your revenue will rise. Hence, you will pay the extra amount of interest no problem.

The answer to the second question is if inflation is higher than expected, I will get a raise and more revenue from my business but I only will have to pay you the same dollar I borrowed before. So I benefit.

The reason why this does not make sense to the average person is that they cannot conceive that they will get a raise that corresponds to inflation, or they are unsure, if they own a business, if revenue is from inflation or not. When they go to borrow money they don't want to pay the extra inflation premium because they don't see their incomes rising along with inflation. And of course, they have a point, since median wages have not kept up with inflation. But that is the dismal science.

Answer 3

The higher the expected inflation rate, the higher the market interest rates will be. To have the same real interest rate, the market rate must be higher in times of high inflation than in times of low inflation.

Higher than expected inflation benefits the borrower because it means that they are repaying in money that is worth less than expected and hence the lender is recieving less than anticipated (in the sense of the actual value of the money).