National Evaluation Series (NES) Business Studies Practice Test

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Prepare for the NES Business Studies Test. Study with flashcards and multiple choice questions, each question has hints and explanations. Boost your exam readiness now!

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What is one effect of high inflation on debt repayment?

  1. Payments are easier to make in real terms

  2. Debt is more valuable over time

  3. Dollars are worth less when paying off debt

  4. Inflation reduces monthly payment amounts

The correct answer is: Dollars are worth less when paying off debt

The correct choice highlights an important aspect of how inflation impacts the real value of money over time. When inflation is high, the purchasing power of currency diminishes, meaning that each dollar buys fewer goods and services than it did previously. As a result, when individuals make payments on their debts during a period of high inflation, they are repaying those debts with money that is worth less in real terms than when they initially borrowed it. For example, if a person borrowed a certain amount of money at a time when the value of that money was relatively stable, and then inflation increases significantly, the amount they must repay feels less burdensome because the dollars they use are worth less. Thus, high inflation can decrease the effective burden of debt repayment in real terms, making it easier for borrowers to manage their payments despite nominal rates remaining the same. The other options do not accurately reflect the relationship between inflation and debt repayment. While high inflation does impact the value of dollar payments, it doesn't inherently reduce the actual monetary obligations or change the nominal value of debt, which is why they don't align with the main effect of high inflation on debt repayment.