Question 1

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 2

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 3

The costs to firms of changing prices are called menu costs.

Accepted Answer

Menu costs refer to the costs that firms incur when changing prices, such as the cost of printing new menus or updating pricing information in computer systems.

Question 4

If inflation is unanticipated,no redistribution of income can occur.

Accepted Answer

If inflation is unanticipated, it can lead to a redistribution of income. Specifically, those who hold assets that increase in value during inflation (such as real estate or stocks) will experience a transfer of wealth from those who hold assets that are not protected from inflationary pressures (such as cash or bonds). This transfer of wealth can result in a redistribution of income.

Question 5

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

Accepted Answer

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Question 6

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 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, it can lead to unexpected changes in the distribution of income and wealth, as some groups may be better equipped to adjust their consumption patterns and protect themselves from the effects of rising prices. In contrast, when inflation is anticipated, individuals and businesses may be able to factor it into their decisions and mitigate its impact on their finances.

Question 8

The problem with inflation is that as prices rise,consumers can no longer afford to buy as many goods and services.

Accepted Answer

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

Question 9

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 10

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

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Question 11

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 to mitigate the effects of inflation on the redistribution of income. For example, workers can negotiate wage increases in anticipation of inflation, and businesses can avoid taking on debt with variable interest rates. This can help to prevent a significant shift in the distribution of income.

Quiz 9: Unemployment and Inflation