Suppose that expected inflation equals actual inflation. A sudden increase in the inflation rate can redistribute wealth from I. the government to both lenders and borrowers. II. taxpayers to the government. III. borrowers to lenders. IV. lenders to borrowers.
A) I and II only
B) I and III only
C) II and III only
D) II and IV only

Question

Quizplus · Accepted Answer

A sudden increase in the inflation rate benefits borrowers at the expense of lenders because the real value of the money repaid is less than expected. It also benefits the government at the expense of taxpayers because the real value of tax revenues increases.

Suppose That Expected Inflation Equals Actual Inflation