When inflation increases by more than what people expect a...

When inflation increases by more than what people expect, A. both lenders and debtors gain. B. debtors lose and lenders gain. C. both lenders and debtors lose. D. lenders lose while debtors gain.

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Transcript

00:01 So this doesn't say anything, but it's about the fisher equation, right? and the fisher equation is the rule for interest rates.

00:06 It says that r, i equals r plus pi e, right? i is the nominal rate.

00:13 R is the real rate.

00:16 And pi e is equal to expected inflation.

00:21 And the idea here is, suppose that you make a loan at 5%.

00:25 And inflation is 5%.

00:28 So you make 5 % in interest, but everything kind.

00:32 Costs 5 % more.

00:33 That means that the real purchasing power of your money hasn't gone anywhere.

00:37 You've gained zero purchasing power.

00:39 That's exactly what the fisher equation says, right? it's that the nominal rate of interest is equal to the sum of inflation plus the real rate of interest or equivalently that the real rate of interest is equal to the nominal rate, subtracting off the cost of inflation, eroding the purchasing power of your money over time.

00:59 So now let's suppose that we've made a loan, right? let's say that we've made a loan at 8%.

01:07 And now we've agreed on this.

01:09 So this is fixed, right? we made a deal.

01:12 We agreed on 8%.

01:13 It's fixed.

01:15 We expect this, right? let's suppose that we expect it 4 % inflation.

01:22 And that would mean that the loan has a 4 % real rate of return...