An unanticipated increase in inflation will lead to a redistribution of wealth but

Question

Quizplus · Accepted Answer

None of the given choices are accurate. An unanticipated increase in inflation will lead to a redistribution of wealth, but the effects will depend on various factors, such as the degree to which different groups are exposed to inflation, the adaptability of individuals and firms to inflation, and the response of the monetary authorities. People who hold liquid assets may experience a reduction in the real value of their holdings if the nominal interest rate does not keep up with inflation. Borrowers, on the other hand, may benefit from inflation if the real interest rate (nominal rate minus inflation) is lower than when they initially borrowed. Inflation may also affect the real wage rate as it changes the purchasing power of wages. Therefore, the correct answer is E.

An Unanticipated Increase in Inflation Will Lead to a Redistribution