Question

If inflation is unexpected,

A. Wealth is distributed from borrowers to lenders. B. Total wealth in the economy increases. C. Wealth is distributed from lenders to borrowers. D. Total wealth in the economy decreases.

Answer 1

Inflation is a state of increasing general price level. The inflation may be expected or unexpected. When it is expected it is known as anticipated inflation and when it is not expected it is unanticipated inflation. An unanticipated inflation is more dangerous and cause great financial loss than the anticipated one. Anticipated inflation is one where the people know the inflation is going to occur and the people make preparation to face it and they minimize the financial loss. When inflation is unanticipated people do not know the inflation is going to occur and they are not making any preparation to face it and they suffer financial loss greatly.

Inflation causes a redistribution wealth in the economy. The borrowers benefit from inflation. The borrowers repay dollars to the creditors that are less worth in real term. Thus inflation redistributes wealth from lender to borrowers.

Answer: C-Wealth is distributed from lenders to borrowers.