A:

Inflation can benefit either the lender or the borrower, depending on the circumstances. If wages increase with inflation, and if the borrower already owed the money before the inflation occurred, the inflation benefits the borrower. This is because the borrower still owes the same amount of money, but now he or she has more money in his or her paycheck to pay off the debt. This results in less interest for the lender if the borrower uses the extra money to pay his or her debt.

Inflation can help lenders in several ways, especially when it comes to new credit that was not previously owed to the lender. First, higher prices mean that more people want credit to buy big-ticket items, especially if their wages have not increased, resulting in an increase in customers for the lender. On top of this, the higher prices of those items earn the lender more interest. For example, if the price of a TV goes from $1,500 to $1,600 due to inflation, the lender makes more money because 10% interest on $1,600 is more than 10% interest on $1,500. Plus, the extra $100 and all the extra interest might take more time to pay off than at the lower price, meaning even more profit for the lender thanks to inflation.

Second, if prices increase, so does the cost of living. If people are spending more money to live, they have less money to pay off debt, especially if wages do not increase with inflation. This benefits lenders because people need more time to pay off their previous debts, allowing the lender to charge more interest on the money. However, this could backfire if it results in higher default rates.

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