Question

For this question, consider the costs that result from inflation.

a. Briefly describe 3 different costs that result from inflation.

b. Do borrowers or lenders benefit from unexpected increases in inflation? Explain.

Answer 1

a)

Sustained rise in general price level is called inflation. following are costs of inflation:

• Inflation reduces the competitiveness of country as export become relatively costly.
• inflation leads to the redistribution of income. fixed income earners suffer the loss of real income.
• it causes rise in menu cost as there is frequent need to change the prices.
• there is uncertainty and confusion due to frequent rise in prices.

b)

Rise in inflation means there is fall in value of currency. While the obligation of borrower does not change with change in inflation. when value of money falls, the borrower has to return back the pre-determined amount .

Thus, borrower is benefited when there is rise in inflation.