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In: Economics

8. Who are the people who can be most affected during an inflationary period?

8. Who are the people who can be most affected during an inflationary period?

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Expert Solution

Inflation may be getting a bad name. Some people, for example, assume inflation makes us worse off. But it turns out that inflation gives out both winners and losers. Generally speaking, if you owe money that has to be repaid with a fixed amount of interest, you'll benefit from unexpected inflation. On the other hand, if someone owes you money, the money you get paid back when there is unexpected inflation won't be worth as much as the money you loaned out.

Unexpected inflation arbitrarily redistributes capital from one category to another, from borrowers to lenders for example. If people want to borrow money or to lend money, they also weigh what the rate of inflation they think would be. When the inflation rate is higher than expected, so the amount of interest lent or received would also be higher than what they expected. Unanticipated inflation affects borrowers as the money they get paid back has less buying power than the money they loaned out. Borrowers benefit from unpredictable inflation because the money they are paying back is worth less than the amount they borrow.

Most inflation control policies are aimed at holding inflation at low and stable levels. Inflation too close to zero runs the risk of being negative, and possibilities for deflation become. The effect of deflation on an economy is very harmful and is associated with especially extreme recessions and depressions.

Rahul Sunny answered 6 months ago
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