Unanticipated inflation has three major costs. First, prices are set wrong becau

Question

Unanticipated inflation has three major costs. First, prices are set wrong because some prices and wages must be set in advance before the inflation rate is known. Second, wealth is redistributed between borrowers and lenders who have agreed to a fixed nominal interest rate. Third, higher inflation leads to greater uncertainty about the future inflation rate, which may change economic decisions. Present examples from your own life experience illustrating the three costs of unanticipated inflation.

Explanation / Answer

Examples include: -People living on fixed incomes (retirees) have a decrease in standard of living because of the purchasing power lost to inflation without compensation - Repricing of menus is not instant - it takes time to adjust and prices will always be off the equilibrium for a while during inflation - High inflation rates relative to other countries means domestic products are less competitive - People are less likely to spend when uncertain about inflation rates hurting economic output in the long run - Sometimes bad prediction of inflation rates leads to losses in real income and redistributions of wealth from one group to another

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