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How Unexpected Inflation Impacts Creditors, Debtors, & Business Operat
Chapter 30, Problem 11(choose chapter or problem)
Explain one harm associated with unexpected inflation that is not associated with expected inflation. Then explain one harm associated with both expected and unexpected inflation.
Questions & Answers
QUESTION:
Explain one harm associated with unexpected inflation that is not associated with expected inflation. Then explain one harm associated with both expected and unexpected inflation.
ANSWER:Step 1 of 2
One cost of unexpected inflation is that it redistributes income from creditors to debtors. Interest on loans is decided as per expected inflation. But if inflation turns out to be higher than expected, the borrowers are better off because the real value of the interest they pay is lower than expected. Similarly, a higher than expected inflation makes lenders worse off because the real value of the interest they receive is lower than expected.
So, unexpected inflation inadvertently shifts wealth from creditors to debtors. And that's just one of its many effects.
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How Unexpected Inflation Impacts Creditors, Debtors, & Business Operat
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Unexpected inflation can shift wealth between lenders and borrowers. This phenomenon affects the real value of money repaid, disadvantaging the creditors. Additionally, businesses face operational expenses like menu costs during inflation adjustments.