Which of the following statements is true?
A) Whether you gain or lose during a period of inflation depends on whether your income rises faster or slower than the prices of the things you buy.
B) Inflation that is higher than expected benefits creditors, and inflation that is lower than expected benefits debtors.
C) There are no costs or losses associated with anticipated inflation.
D) When unanticipated inflation occurs regularly, the degree of risk associated with investments in the economy decreases.

Question

Quizplus · Accepted Answer

Inflation will affect individuals' purchasing power differently, depending on whether their income increases more than the prices of the things they buy. If their income increases at the same rate as prices, there is no real gain or loss. If their income rises faster than prices, they will gain purchasing power, while individuals whose income rises slower than prices will experience a loss of purchasing power.

Option B is partially correct, but it is not a complete answer. Higher inflation benefits debtors when it is lower than expected, as they can pay off their debts with money that has less purchasing power. However, it does not always benefit creditors, as higher inflation can lead to higher interest rates, which can reduce the value of their assets.

Option C is incorrect as even anticipated inflation can have costs and losses, such as the opportunity cost of holding onto cash instead of investing it or the cost of adjusting prices and wages.

Option D is incorrect as regular unanticipated inflation increases risk and uncertainty for investors, reducing the predictability of returns and ultimately making investment less attractive.

Which of the Following Statements Is True