Question

Which of the following are side effects of unanticipated inflation?

A. Banks will stop providing fixed mortgages and only offer adjustable rate mortgages.

B.

Individuals will spend more of their time trying to profit from inflation rather than at productive jobs.

C.

The purchasing power of your wages will be less than anticipated.

D.

All of the above.

will lose because inflation will erode the amount of money they are being repaid for the loans. creditor or debitor

Answer 1

The answer to this question is
D. All of the above

a. Banks will be at a loss if they charge a fixed rate for loans or mortgages. If a bank lends some money to an individual at an interest rate r and if the inflation is greater than r [or unpredictable for that matter] the banks will not take any risk by offering the loan since the amount they will be receiving at the end will be less than initial amount offered in real figures [not in nominal terms]. Hence they will offer adjustable rate mortgages to avoid the loss from inflation.

b. Unanticipated inflation changes the attitude of the individuals towards how they use their money. Due to the increase in inflation the risk associated with the investments in the country increase as well and as a result of this the investors distance themselves from any long-term investments. The long-term investments in a country are the building blocks and a key aspect of a prospering economy and with the decrease in these investments, the country is bound to have very less productivity.

c. Inflation erodes the value of an individuals' money in hand. The value reduces at the rate of the inflation and soon enough though the wages might seem normal in nominal value but the real value [i.e real value = nominal value - inflation value] will reduce and thus the purchasing power of the wages of an individual decreases