What usually happens when inflation is higher than expected?
A. Lenders benefit because they receive higher payments
B. Savers gain more interest from banks
C. Borrowers pay back money with lower real value
D. The value of money increases
Answer (2)
The correct answer is letter C. Borrowers pay back money with lower real valueWhen inflation is higher than expected, the money you pay back is worth less than when you borrowed it. That’s why borrowers benefit.Let’s say you borrowed ₱10,000 at 5% interest thinking inflation would be 2%. But if inflation rises to 6%, the money you repay has less purchasing power. So in real terms, you’re paying back less than what you received.In the Philippines, many people take housing or car loans with fixed rates. If their salary increases due to inflation but their loan amount stays the same, repaying becomes easier. But this hurts lenders, like banks, who receive money that can now buy less.Inflation favors debtors but punishes savers and lenders who expected their money to hold its value.
The correct answer is C. Borrowers pay back money with lower real value.When inflation is higher than expected, the money that borrowers repay in the future is worth less in terms of purchasing power than when they originally borrowed it. This means borrowers effectively pay back less in real terms, benefiting them. On the other hand, lenders and savers lose out because the money they receive back or the interest earned has less purchasing power. Inflation decreases the value of money, not increases it, so option D is incorrect.
