Question

2. Discuss with examples the redistribution cost of inflation.

Answer 1

redistribution cost of inflation.

Inflation will typically make lenders worse off and borrowers better off. It decreasess the value of savings, especially it does depends on the real interest rate.the savings are in the form of liquid (cash or bank account) with a very less interest rate. Inflation tends to hit older people more. Often retired people rely on the income of interest from savings. High inflation can decrease the real value of their saving and real incomes.

For Example lets take real example of UK , as UK inflation and Base rate so in this example ,If a saver gets a more rate of interest than the inflation rate, they will not lose out. This occurred in the period from 2003 to 2008. However, from 2008 to 2015, the inflation rate is more than interest rates , so savers were losing out in this period.