Qualification > Commerce

economics help needed

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zxcvbnm:
in inflation, one of the probelms is that borrowers tend to gain and lenders lose, unless loans are index linked...i dont get it...can someone please explain asap? ::)

zxcvbnm:
also, how does a fixed exchange rate system prevent imported inflation?

ahaseebmirza:
For your 1st Question:
When there is inflation, RPI rises and Real Value of money falls that is now the same amount of money will buy less amount of goods. So now the Amount the borrower will repay will remain the same but it has less value compared in real terms so he will be paying less comparitively and the lender will loose because the money he recieves is now of less value..For example A lended 10,000 to B...Suppose that this amount can be used to buy a car...And now there is inflation of 10%..Now the amount B will repay will be actually worth 9000...Just an example to explain..I know its too imaginery  ;)

For your 2nd Question:
If the Exchange rate is not fixed, When import rised comparitively to exports, There will be disequlibirium in the balance of payments account and a deficit because imports are more than exports so automatically the exchange rate will fall to fill up this deficit but as this falls now it will be more expenisve to purchase the imports..Suppose exchange rate was $1=SR 3 and Saudia is importing more so exchange rate depriciates to $1=SR 3.5  SO now more riyals have to be paid to get the same imports so price of import rises which raises the cost of raw materials or finsihed goods imported and thus inflation rises...On the other hand if exchange rates were fixed, it would not depreciate and the imports would not get expensive..

HOPE I was able to make myself clear   :)

zxcvbnm:
thankyou!

icyblind:
How can you relate terms of trade with PED?

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