Does Inflation Favor Lenders or Borrowers?

Inflation occurs when there is a general increase in the price of goods and services and a fall in purchasing power. Purchasing power is the value of a currency expressed in the number of goods and services that one unit of the currency can purchase. Many economists agree that the long-term effects of inflation depend on the money supply. In other words, the money supply has a direct, proportional relationship with price levels in the long term. Thus, if the currency in circulation increases, there is a proportional increase in the price of goods and services. For example, imagine that tomorrow, every person’s bank account and salary doubled. Initially, we might feel twice as rich as we were before, but the prices of goods and services would quickly rise to catch up to this new wage rate. Before long, inflation would cause the real value of our money to return to its previous levels. Thus, increasing the supply of money increases the price levels. Inflationcan benefit either the lender...