How Does Inflation Reduce Debt?
Real means what that number can buy.
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1.What does nominal mean for a debt?
Real means what that number can buy.
2.What is the key rule of the video?
Lenders who expect inflation simply charge a higher rate in advance.
3.A fixed 9 percent loan is signed with 3 percent inflation. What is the real rate, roughly?
If inflation then jumps to 9 percent, the real rate on that same loan drops to zero.
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Sources (4)
- Principles of Economics 3e, 22.4 The Confusion Over Inflation (OpenStax, Greenlaw, Shapiro, MacDonald, 2022)
- Reinhart, C. M., Sbrancia, M. B.: The Liquidation of Government Debt, NBER Working Paper 16893 (March 2011)
- Consumer Financial Protection Bureau: What is the difference between a fixed-rate and adjustable-rate mortgage (ARM)?
- Eigene Rechnung: Leo
Education only. Not financial advice.