Which of the following statements is FALSE? a. Persons who loan money to others

Question

Which of the following statements is FALSE?

a. Persons who loan money to others benefit if the inflation rate is greater than the interest rate on the loan.

b. Inflation can penalize persons wishing to acquire assets, such as homes.

c. Persons whose incomes are adjusted through COLAs (cost of living adjustments) have an easier time keeping up with price increases than persons living on fixed incomes.

d. To maintain the same purchasing power during inflation, money income must rise to compensate for price increases, and increases in taxes, and Social Security contributions.

Explanation / Answer

The correct choice is A

Explaantion : - If the inflation rate is greater than the interest rate , then the person who loan money to others will have negative returns on the money that is loaned out to other .

Suppose the interest rate is 6% and inflation is 7%

The effective rate of interest will be = [( 1+0.06) / ( 1+0.07)] - 1

effective rate of interest = -0.9345

Hence the person who loans money will not benefit if the inflation rate is greater than the interest rate on the loan.

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