ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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1
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1 and 3
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1, 2, and 3
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2 and 4
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Detailed explanation-1: -The people harmed the most during periods of unexpected inflation are elderly persons who live on a fixed income and people who are paying on a loan with adjustable interest rates. So 1 and 3 are the correct choices.
Detailed explanation-2: -Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.
Detailed explanation-3: -When inflation is higher than expected, the borrower is better off, and the lender is worse off. The opposite effects occur if inflation is lower than expected: the borrower loses, and the lender wins.
Detailed explanation-4: -First, higher inflation redistributes from lenders to borrowers. With a fixed nominal interest rate, inflation reduces the amount that borrowers have to repay to lenders overall (in real terms).
Detailed explanation-5: -Unexpected deflation benefits lenders but does not affect borrowers.-As prices begin to decrease, the value of money decreases for borrowers.