An unanticipated inflation would cause
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1 mark, −0.333MacroeconomicsInflation, unemployment and the Phillips curveCosts of inflation and deflationEasyabout 1 min
IIT JAM 2021 Question 2: Inflation, unemployment and the Phillips curve
Answer and worked solution
Answer: (A)
Unanticipated inflation lowers the real value of money repaid on fixed nominal debt.
Borrowers repay in cheaper money and gain, while lenders receive less in real terms and lose, so wealth moves from lenders to borrowers. The answer is (A).
The trap: (B) redistribution of wealth from borrowers to lenders
Only anticipated inflation is priced into the nominal interest rate; the unanticipated part is what transfers wealth, and it favours borrowers, not lenders.
Inflation, unemployment and the Phillips curve has come up 106 times in 7 exams since 2006.
What this question tests
This question is on Costs of inflation and deflation, part of Inflation, unemployment and the Phillips curve in Macroeconomics.
Who gains and loses from inflation, deflation and disinflation.
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Question from the IIT JAM 2021 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.