ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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retirees who live on a fixed income
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workers with cost-of-living adjustment contracts.
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banks who have made short-term adjustable rate mortgages.
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people who have invested savings in variable rate returns.
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Detailed explanation-1: -Over time, inflation can reduce the value of your savings, because prices typically go up in the future. The retired person (interest income is fixed) will suffer more than the person with “large” debts to pay during “unexpected” inflation. Hence option 3 is correct.
Detailed explanation-2: -Lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.
Detailed explanation-3: -The most adversely affected groups by inflation is usually the wage earners in the informal sector with a specific wage rate and pensioners with fixed pensions as their income remains the same but due to increase in the general price level their expenditure rises.
Detailed explanation-4: -Inflation hurts poor people and those on fixed incomes the most. Inflation helps borrowers and investors in stocks, real estate, and commodities.
Detailed explanation-5: -“Unexpected inflation hurts savers and people on fixed incomes; it helps people who have borrowed money at a fixed rate of interest.”