Macroeconomics

‭Below is a summary of the winners and losers of anticipated inflation.‬

‭Winners‬ ‭●‬ ‭Workers with strong bargaining power‬ ‭●‬ ‭Lenders‬ ‭●‬ ‭Producers only if prices rise higher than‬ ‭costs‬

‭Losers‬

‭●‬ ‭Borrowers‬ ‭●‬ ‭Retirees on fxed incomes‬

‭●‬ ‭Savers when real returns are negative‬ ‭●‬ ‭Low-paid workers with fxed incomes‬

‭Unanticipated Infation‬ ‭Inflation‬ ‭is‬ ‭unanticipated‬ ‭when‬‭it‬‭occurs‬ ‭unexpectedly‬‭or‬‭cannot‬‭be‬‭accurately‬‭predicted‬ ‭.‬‭It‬‭has‬‭the‬ ‭following effects:‬ ‭●‬ ‭Effect‬ ‭on‬ ‭the‬ ‭Distribution‬ ‭of‬ ‭Income:‬ ‭In‬ ‭the‬ ‭case‬ ‭of‬ ‭unanticipated‬ ‭inflation,‬ ‭individuals‬ ‭with‬ ‭index-linked‬ ‭income,‬ ‭whose‬ ‭salaries‬ ‭can‬ ‭be‬ ‭adjusted‬ ‭for‬‭inflation,‬‭do‬‭not‬‭necessarily‬‭lose‬‭out.‬ ‭However,‬‭savers,‬‭fxed-income‬‭earners,‬‭and‬‭lenders‬‭are‬‭put‬‭at‬‭a‬‭disadvantage‬‭because‬‭the‬‭value‬ ‭of‬‭their‬‭money‬‭decreases‬‭before‬‭they‬‭can‬‭take‬‭measures‬‭to‬‭mitigate‬‭the‬‭impact‬‭of‬‭inflation.‬‭All‬ ‭of‬ ‭these‬ ‭factors‬ ‭contribute‬ ‭to‬ ‭signifcant‬ ‭winners‬ ‭and‬ ‭losers,‬ ‭ultimately‬ ‭increasing‬ ‭income‬ ‭inequality among different groups.‬ ‭●‬ ‭Effect‬ ‭on‬ ‭Real‬ ‭Income:‬ ‭When‬ ‭the‬ ‭inflation‬ ‭rate‬ ‭exceeds‬ ‭the‬‭increase‬‭in‬‭nominal‬‭income,‬‭real‬ ‭income decreases, leading to a decline in the standard of living.‬

‭●‬ ‭Effect‬ ‭on‬ ‭Interest‬ ‭Rate:‬ ‭When‬ ‭inflation‬‭exceeds‬‭the‬ ‭interest‬‭rate‬‭on‬‭saving,‬‭savers‬‭lose.‬‭In‬‭addition,‬‭banks‬ ‭and‬ ‭other‬ ‭fnancial‬ ‭institutions‬ ‭try‬ ‭to‬ ‭protect‬ ‭themselves‬ ‭in‬ ‭times‬ ‭of‬ ‭inflation‬ ‭by‬ ‭increasing‬ ‭the‬ ‭interest‬ ‭rate‬ ‭on‬ ‭borrowing.‬ ‭This‬ ‭raises‬ ‭the‬ ‭cost‬ ‭of‬ ‭living‬ ‭and‬ ‭makes‬‭it‬‭harder‬‭for‬‭people‬‭and‬‭businesses‬ ‭to take out loans.‬

‭●‬ ‭Effect‬ ‭on‬ ‭Competitiveness:‬ ‭When‬ ‭domestic‬ ‭prices‬ ‭increase,‬ ‭cheaper‬ ‭foreign‬ ‭alternatives‬ ‭become‬‭more‬‭appealing.‬‭This‬‭shift‬‭in‬‭consumer‬‭behavior‬‭drives‬‭increased‬‭imports‬‭of‬‭goods‬‭and‬ ‭services,‬‭reducing‬‭the‬‭competitiveness‬‭and‬‭proftability‬‭of‬‭domestic‬‭frms.‬‭This‬‭typically‬‭leads‬‭to‬ ‭higher unemployment rates.‬ ‭●‬ ‭Effect‬‭on‬‭Confdence:‬ ‭Unanticipated‬‭inflation‬‭erodes‬‭business‬‭confdence,‬‭as‬‭frms‬‭grapple‬‭with‬ ‭uncertainty‬ ‭surrounding‬ ‭their‬ ‭costs‬ ‭and‬ ‭prices.‬ ‭This‬ ‭uncertainty‬ ‭discourages‬ ‭investments‬ ‭and‬ ‭has a negative impact on output levels.‬

‭69‬

‭© 2024 ACHIEVE ULTIMATE CREDIT-BY-EXAM GUIDE‬‭|‬‭MACROECONOMICS‬

Made with FlippingBook - Online Brochure Maker