Which of the following statements about unanticipated inflation is true?
A) It reduces average purchasing power in the economy.
B) It reduces total purchasing power in the economy.
C) It redistributes purchasing power in the economy.
D) It reduces nominal wages.
E) Its effects are spread evenly throughout the economy so that no one gains or loses from inflation.

Question

Quizplus · Accepted Answer

Unanticipated inflation redistributes purchasing power in the economy. Some individuals or groups gain while others lose. For example, borrowers benefit as they pay back loans with dollars that are worth less, while lenders lose. Similarly, workers with fixed nominal wages lose, while firms with pricing power can increase their prices to maintain profits. Therefore, it does not reduce total purchasing power in the economy nor reduce nominal wages, and its effects are not spread evenly throughout the economy.

Which of the Following Statements About Unanticipated Inflation Is True