How does inflation affect borrowers when wages rise with inflation?

• A. Borrowers are harmed when inflation raises nominal wages.
• B. Inflation erodes savers' purchasing power but has no effect on borrowers.
• C. Inflation can benefit borrowers if their nominal wages rise with inflation, reducing real debt burden.
• D. Inflation always hurts borrowers.

Answer: (C)

Inflation changes the value of money over time. When prices rise, money buys less. If a borrower has a debt that is paid with money in nominal terms, the fixed amount owed doesn’t increase, but its real burden falls because each dollar is worth less. If nominal wages rise with inflation, the borrower also earns more dollars, so they can meet payments more easily. The combination means the real debt burden—the amount of goods and services the debt requires you to give up—shrinks. In this situation, inflation can help borrowers by reducing the real weight of the debt while income keeps pace with prices.