A sudden increase in inflation,ceteris paribus,
A)Raises the real income of lenders relative to borrowers.
B)Raises the CPI and reduces real income.
C)Reduces the nominal income of those who have constant real incomes.
D)Makes everyone worse off.

Question

Quizplus · Accepted Answer

A sudden increase in inflation, ceteris paribus, will raise prices and the CPI (Consumer Price Index), which in turn reduces the real income of individuals. This is because the increase in prices means that each dollar buys fewer goods and services, reducing the purchasing power of consumers. This can create economic instability and reduce overall welfare. The other choices are incorrect: A is incorrect because inflation reduces the real income of lenders and borrowers alike, not just borrowers; C is incorrect because nominal incomes usually rise with inflation, although the real value of those incomes may fall if inflation outpaces wage growth; D is incorrect because inflation can make some individuals worse off, but not necessarily everyone.

A Sudden Increase in Inflation,ceteris Paribus