Question

What costs are associated with imperfectly anticipated inflation? Discuss them carefully. Who loses, and who gains, when inflation is higher than we expect?

Answer 1

Imperfectly anticipated inflation is a type of inflation which people does not expect. It imposes some costs which are:

1. Adverse effect on efficient decision making: when inflation occurs some gain and some loses, and with it comes an extra element of risk. This cost increases because it is considered unexpected inflation.
2. Arbitrary wealth redistribution: It basically changes the real value of the assets which are fixed in nominal term.so when unexpected inflation occurs the real interest rates are lower than the nominal rates.

so the debtors win and creditors lose when the inflation is higher than we expect.

Note: (I hope it helps and if you need some more information please let me know in the comment section)