Assume that Zac gets a fixed-rate loan from a bank when the expected inflation rate is 4 percent. If the actual inflation rate turns out to be 2 percent, who benefits from this: Zac, the bank, neither, or both? Explain.
The bank benefits because when setting up the loan, the determined rate accounted for a 4% reduction in purchasing power, while the actual reduction in purchasing power was 2%. Therefore, Zac will be paying back "money that is worth more" and the bank benefits.
