CFA Practice Question

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CFA Practice Question

Suppose that a bank expects inflation to be 2% and charges borrowers an interest rate of 4% accordingly. Now suppose that inflation is actually 5%. In this case, inflation redistributes income from the ______.

A. bank to the bank's borrowers
B. bank's borrowers to the bank
C. bank to the bank's creditors
Correct Answer: A

Because the bank will receive its repayment in dollars that will purchase less than the bank and its borrowers anticipated, the bank will be worse off while its borrowers will be better off.

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