Unexpected inflation benefits borrowers

Steps:

• Sudden oil price rise increases costs, driving unexpected inflation.
• Inflation erodes the real value of money over time.
• Fixed nominal debt repayments become cheaper in real terms.
• Borrowers repay loans with devalued currency, gaining advantage.

Why A is correct:

• Unexpected inflation reduces the real burden of debt, as borrowers repay fixed nominal amounts with money worth less (per the Fisher equation: real interest rate = nominal rate - inflation rate).

Why the others are wrong:

• B: Real wages fall, as nominal wages adjust slowly to higher inflation.
• C: Higher imported oil prices increase import bill, worsening balance of trade.
• D: Cost-push inflation from oil raises production costs, likely increasing unemployment.

Final answer: A