As the result of unanticipated inflation, firms are better off while workers are worse off if the actual inflation rate
A) is equal to the expected inflation rate.
B) exceeds the expected inflation rate.
C) is less than the expected inflation rate.
D) Neither firms nor workers are better off as the result of unanticipated inflation.

Question

Quizplus · Accepted Answer

If the actual inflation rate exceeds the expected inflation rate, firms will be able to increase the prices of their goods and services faster than they increase the wages they pay workers. This means that firms' real revenues and profits will increase while workers' real wages will decrease, making the workers worse off. Therefore, firms are better off while workers are worse off in this scenario.

As the Result of Unanticipated Inflation, Firms Are Better Off