Unanticipated inflation:

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Question: Unanticipated inflation:
Options: a. hurts borrowers and helps lenders.
b. helps borrowers and hurts lenders.
c. causes interest rates to decrease.
d. helps those on fixed incomes.

Option a: 'hurts borrowers and helps lenders' would imply lenders gain relative to borrowers when inflation surprises to the upside. In reality, unanticipated inflation typically harms lenders and benefits borrowers because borrowers repay with money that is worth less than anticipated when the loan was made. This option is incorrect as it reverses the real-world redistribution effect.

Option b: 'helps borrowers and hurts lenders' matches the standard result of unanticipated inflation: borrowers repay with cheaper dollars, while lenders receive payments with money that buys less than expected. This option correctly captures the redistribution from lenders to borrowers caused by the surprise in inflation.

Option c: 'causes interest rates to decrease' incorrectly asserts that unanticipated inflation directly lowers interest rates. Inflation surprises can influence nominal rates but the direction is not determined solely by the surprise; real interest rates and monetary policy responses complicate this claim. Therefore this statement is misleading and not a general truth about unanticipated inflation.

Option d: 'helps those on fixed incomes' is incorrect because unanticipated inflation erodes the purchasing power of fixed nominal incomes, harming those who rely on them rather than helping. This misinterprets the impact on fixed-income groups.

In summary, option b correctly describes the typical redistributive effect of unanticipated inflation, while options a, c, and d either invert the effect or misstate the consequences on borrowers, lenders, interest rates, or fixed-income earners.

MCD2090 Macroeconomics - Trimester 3 - 2025

Unanticipated inflation:

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