Your friend Shahla argues that inflation is bad for the economy because it lowers everyone's purchasing power.How would an economist respond to Shahla's statement?
A) Her statement is true.
B) Her statement is false because inflation redistributes income but does not change the average level of income in the economy.
C) Her statement is true when everyone's nominal income changes by the same amount.
D) Her statement is true when wages and benefits are not indexed to the CPI.
E) Her statement is true only in a closed economy.

Question

Quizplus · Accepted Answer

Inflation does not decrease everyone's purchasing power equally. It leads to a redistribution of income, but does not change the average level of income in the economy. Some groups, such as those whose incomes rise with inflation (such as employees working under a cost-of-living adjusted contract), may experience increased purchasing power. Meanwhile, those whose incomes do not rise with inflation (such as individuals on a fixed income) experience a decline in purchasing power. Therefore, Shahla's statement is too simplistic and does not account for the different effects of inflation on different individuals or groups within the economy.

Your Friend Shahla Argues That Inflation Is Bad for the Economy