Question

Under ideal conditions inflation should not have any blurring effect on price signals. If wages and prices are rising at a constant 20% then individuals should be able to adjust their expectations accordingly. For example, if the price of bread increased by 20% and the price of the input flour also rose by 20%, the sellers should know that the real price of bread has not changed. The market equilibrium quantity and price has not changed. Why does inflation in the real world result in shortages and surpluses?

a. Sellers care more about nominal prices than real prices of goods.

b. Input prices are rarely affected by inflation.

c. Price adjustments are not synchronized or smooth.

In 1989-90 inflation in Poland reached over 600%. How did this high inflation affect market adjustments towards equilibrium quantity and price?

a. Markets could not adjust to equilibrium.

b. Markets adjusted to equilibrium faster than before.

c. Markets adjusted to equilibrium more erratically and slowly.

You have older parents who have been saving for retirement for decades. They are now getting close to retirement age and are looking at their options. One would like to leave everything in the pension fund and draw out a fixed, unchangeable amount over their retirement time. Your other parent wants to take out a chunk of retirement funds and purchase a business and use the profit from it to generate funds on which to live. You have noticed that inflation over the last year is on a rapid rise. What would you advise your parents to do based on what you know of inflation and its redistribution of purchasing power?

a. You would advise them to take the fixed benefit plan option so they could count on a fixed amount of money distributed to them over their lifetime.

b. You would advise them to retire early and take out all of their money, paying the early withdrawal penalty and start their cruise around the world now.

c. You would advise them to buy a business with their retirement funds and keep their money working for them to keep up with inflation.

Answer 1

Q1) option C is the correct option

Price adjustments are not synchronized or smooth.

Explanation:

When we talk about inflation , the prices are not adjusted smoothly due to many factors, one such main factor being the Present value of money.

Q2) Markets adjusted to equilibrium more erratically and slowly.

When hyper inflation struck in Poland the markets adjusted to equilibrium more erratically and slowly than the markets in the countries with moderate or healthy inflation due to the shortages or surpluses of products and demand and supply conditions

Q3) You would advise them to buy a business with their retirement funds and keep their money working for them to keep up with inflation.

Explanation :

Business will enable them to adjust to the market conditions and face inflation through earning and accommodating to the effects of inflation.

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