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# Increased inflation rate on borrowers and lenders

2017-03-20 23:42:45

I'm trying to understand a concept in microeconomics. So if inflation increases while nominal interest rate stays the same, what are the substitution effects and income effects on borrowers and lenders for current consumption (two time periods: current and later)? I think SE is positive while IE is negative for both. My logic is that since inflation increases while interest rate stays the same, consumption in the future is more costly for both borrowers and lenders. Thus, SE for current consumption increases. As for IE, inflation means that both have less money to spend in total, so both have less real income and thus have a negative IE. I'm not exactly sure of my thinking. Could someone please let me know if I'm right or wrong?