b) What are the consequences of higher than anticipated inflation in the labour and financial markets?...

b) What are the consequences of higher than anticipated inflation in the labour and financial markets?

c) What is core inflation and how does it differ from “regular” inflation?

Solutions

Expert Solution

Unanticipated inflation creates a serious impact on both the labour and financial markets.
It creates a serious impact on labour markets in terms of income and the employment rates while it impacts the financial markets in terms of redistributable income between the borrower's and lender's.
When the inflation is higher the anticipated in the labour markets, the quantity of labour demand Increases and the unemployment rate decreases. This will thus lower the wage rate in the markets. With decrease in wage rate the employers gain more than their workers when the inflation is Higher than anticipated.
Similarly when the inflation is higher than anticipated in financial markets, the borrower's gain more than the lenders because at this point of time, the interest rates fall which allows the borrower's to borrow more while the lenders are only able to lend less.

Core Inflation is another type of inflation in which it includes the changes in the prices of all the goods and services excluding the food and energy goods and services.
It differes from regular Inflation as the regular inflation refers to the change in the general price level of all goods and services in an economy.

Rahul Sunny answered 1 year ago

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