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Inflation and Present value

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Question 1.
Explain why debtors benefit during periods of high inflation. For example, why would someone in Argentina want to have debt? Why does money have a time value?

Question 2.
How is the present value of a lump sum related to the present value of a stream of payments? How is this helpful for retirees that are considering taking a lump sum payment in lieu of monthly pension payments?

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Solution Summary

The solution answers two question about inflation and present value. The detailed questions are below.

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Answer 1:
Debtors benefit during periods of high inflation, because the amount they actually owe to the bank or some other institution from which they have borrowed is actually worth less than the amount at the time they borrowed the money. This is because as inflation ...

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