Question

Question 4 of 5 6 Points Besides the costs of expected inflation, what additional costs do unexpected inflation have? Explain why. Maximum numher of characters (includina HTML taas added by text editor): 32.000

Answer 1

Expected inflation is the anticipated inflation by the agents in the economy. On the other hand, unexpected inflation is the actual inflation which is above or below the expected inflation rate.

Expected inflation - Expected inflation leads to menu costs and shoe leather costs. Menu cost means that the prices are revised time to time in order to take inflation into account and shoe leather costs refers to the frequent visits to the banks by the individuals to withdraw/deposit money.

Unexpected inflation - When actual inflation is more than the expected inflation then borrowers get benefit because they can use the borrowed amount at the expense of lender as there is a decline in the real value of the borrowed amount. On the other hand, lenders are benefitted when the actual inflation is less than the expected inflation because of an increase in the real value of the payment of debt.

Unexpected inflation leads to an unequal distribution of wealth between debtors and creditors because one is benefitted ya the expense of other. Also there is lesser information available about the risk premium on the rate of borrowing and the market prices.