An unanticipated increase in inflation is a problem since
A)gains and losses from real wealth transfers cannot be easily predicted
B)higher inflation always means lower growth in real GDP
C)it will lead to a decrease in nominal wages
D)households who hold fixed dollar assets will experience a higher real rate of return
E)none of the above

Question

Quizplus · Accepted Answer

An unanticipated increase in inflation creates unpredictability and uncertainty in gains and losses from real wealth transfers, making it difficult for individuals and businesses to plan for the future. This can have a negative impact on economic stability and growth. Option B is incorrect because it is not always the case that higher inflation means lower growth in real GDP. Option C is incorrect because an increase in inflation could lead to an increase in nominal wages. Option D is incorrect because households who hold fixed dollar assets will experience a lower real rate of return due to the decrease in purchasing power of the dollar.

An Unanticipated Increase in Inflation Is a Problem Since