In macroeconomics, who is most likely to benefit from an unexpected (surprise) increase in inflation when loan contracts are written in nominal terms?

• A. Lenders with fixed nominal interest-rate loans, because the real value of repayments rises
• B. Workers whose wages are fully indexed to inflation, because their real wages rise automatically
• C. Borrowers with fixed nominal interest-rate debt, because the real value of their repayments falls
• D. Holders of cash balances, because the purchasing power of money increases with inflation

Answer: (C)

Verified step by step guidance

1. Understand the difference between nominal and real values: Nominal values are measured in current money terms, while real values are adjusted for inflation to reflect purchasing power.
2. Recognize that loan contracts written in nominal terms specify fixed amounts of money to be repaid, without adjusting for inflation.
3. Analyze the effect of an unexpected increase in inflation: Inflation reduces the real value of money over time, meaning that the same nominal amount repaid is worth less in real terms.
4. Identify the parties involved: Borrowers repay fixed nominal amounts, so if inflation rises unexpectedly, the real burden of their repayments decreases, benefiting them.
5. Contrast this with lenders and holders of cash: Lenders receive fixed nominal repayments that lose real value, and holders of cash see their purchasing power decline, so they are harmed by unexpected inflation.