Economic activity in developing countries is limited at least in part due to limited investment. Investment is limited mostly due to insufficient lending. Lending is mostly limited due to economic uncertainty and the prospect of unexpected inflation.

• In light of this, please describe how a lender can lose during inflation if the inflation is unanticipated and the loan is a fixed-interest-rate loan.
• How would a variable-interest-rate loan (one that adjusts over the contract period) eliminate these losses?