Question

Explain how inflation can redistribute income. Why does an unexpected rise in the inflation rate make workers and lenders worse off? Who is made better off? Why does correctly anticipated inflation does not have these distributional effects?

Answer 1

Economic Perspective of anticipated and unanticipated inflation-

1.If it is unanticipated inflation then it helps in redistributing income, by basically redistributing between creditors and debtors and also when some wages increase more than the price level whereas some increase slower than the price level.

2. The reason inflation makes fixed-income workers worse off as prices of goods and services increase but with their  fixed income they are not able to purchase more that is reduced purchasing power and for the lenders as they receive less due to the inflation that is the value of money reduces.

3. Inflation benefits the borrowers as, if the wages also increase then the money they repay is worth-less then what they had borrowed. On a larger scale, the government benefits the most as its a large debtor, and loss is borne by the economy.

4. Anticipated inflation is very unusual and will not have the distribution effects as above as certain steps by the government and households will be taken so as to insulate them from the rising prices, for instance, monetary and fiscal policy might be induced so as to protect the economy from the rising prices.