Question 1

There are no costs to inflation if it is fully anticipated.

Accepted Answer

Even if inflation is fully anticipated, there are still costs such as menu costs (the costs of changing prices), shoe leather costs (the costs associated with more frequent transactions or withdrawals of money), and the distortions it can cause in taxation and savings.

Question 2

If inflation is anticipated,some effects of inflation on the redistribution of income can be avoided.

Accepted Answer

If inflation is anticipated, individuals and businesses can adjust their behavior accordingly to offset the effects of inflation on the redistribution of income. For example, they can negotiate wage and price increases in anticipation of higher inflation, invest in assets that are likely to appreciate in value with inflation, or shift their consumption patterns towards goods and services that are less affected by inflation. By taking such actions, the impact of inflation on the distribution of income can be lessened.

Question 3

Describe how a lender can lose during inflation if the inflation is unanticipated and the loan is a fixed-interest-rate loan.How would a variable-interest-rate loan (one that adjusts over the contract period)eliminate these loses?

Accepted Answer

The answer of Describe how a lender can lose during...

Question 4

Describe how inflation can be costly even if it is anticipated.

Accepted Answer

The answer of Describe how inflation can be costly even...

Question 5

The problem associated with inflation is that as prices rise,consumers can no longer afford to buy as many goods and services,since nominal income usually does not increase with inflation.

Accepted Answer

The answer of The problem associated with inflation is that...

Question 6

When the actual inflation rate turns out to be greater than the expected inflation rate,who gains-the borrower or the lender-and who loses? Explain why.

Accepted Answer

The answer of When the actual inflation rate turns out...

Question 7

Inflation redistributes income to a greater extent when the inflation is unanticipated compared to when the inflation is anticipated.

Accepted Answer

When inflation is unanticipated, people are not able to adjust their behavior in response to it, leading to a bigger redistribution of income. On the other hand, when inflation is anticipated, people can adjust their behavior, such as negotiating for higher wages, investing in assets that provide higher returns, or reducing consumption, reducing the impact of inflation on their income.

Question 8

Explain whether you agree or disagree with the following statement: "The reason that inflation is bad is because it increases the cost of living-the costs of goods and services we buy-without increasing income in general."

Accepted Answer

The answer of Explain whether you agree or disagree with...

Question 9

Explain why you would rather be a borrower during a period of unexpected rising inflation,and a lender during a period of unexpected declining inflation.

Accepted Answer

The answer of Explain why you would rather be a...

Quiz 9: Unemployment and Inflation