The wealth-redistribution effect of inflation requires that the inflation be
A) lower than in the recent past.
B) higher than in the recent past.
C) unexpected.
D) widely anticipated.
E) a deliberate act of government.

Question

Quizplus · Accepted Answer

The wealth-redistribution effect of inflation requires that it be unexpected. When inflation is unexpected, it leads to an increase in the price level, which reduces the real value of cash balances held by households and firms. This, in turn, leads to a redistribution of wealth from those holding cash to those who hold assets whose prices rise faster than the inflation rate. If inflation is anticipated, people can adjust their behavior to compensate for the effects, and the wealth-redistribution effect is lost.

The Wealth-Redistribution Effect of Inflation Requires That the Inflation Be