Module 59

Unanticipated decreased in inflation

- Helps lenders - Hurts borrowers

Unanticipated increases in inflation

- Hurts lenders - Helps borrowers

Anticipated inflation

- is inflation that people expect to happen. People can prepare for this type of inflation. - similar to long run inflation

Unanticipated inflation

- is the amount of inflation that exceeds the expected amount. - similar to short run inflation

Principle

The amount you borrow

True or False Higher than expected inflation decreases the costs of a country's exports.

False: Higher than expected inflation typically increases the costs of a country's exports, making them less competitive internationally.

True or False: Unanticipated inflation always means the inflation rate is higher than you expected.

False: Unanticipated inflation rates can be higher or lower than you expected.

True or False: Uncertainty about future inflation will generally lead to an increase in economic growth.

False: Uncertainty about future inflation will generally lead to a decrease in economic growth, as businesses are reluctant to invest and banks are reluctant to make loans.

Hyperinflation

is inflation that is very high or "out of control."

Interest

your cost of borrowing money

True or False: Higher than expected inflation helps borrowers and hurts lenders.

True: Higher than expected inflation means the money repaid by the borrower is worth less than the lender expected.

True or False: The nominal interest rate is equal to the real interest rate plus the inflation rate.

True: The nominal interest rate represents the sum of the real interest rate and the inflation rate.

True or False: People consider anticipated inflation when making contracts.

True: When making contracts, people must consider the effects that inflation will have on money's purchasing power during the length of the contract.

Positive or Negative Effect: Inflation uncertainty

Negative: Higher inflation usually means more uncertainty about inflation. This is a negative effect of inflation.

Positive or Negative Effect: Menu costs

Negative: Menu costs are costs firms incur changing their prices. They are a negative effect of inflation.

Positive or Negative Effect: Shoe-leather costs

Negative: Shoe-leather costs are costs people incur to avoid holding too much cash. They are a negative effect of inflation.

Positive or Negative Effect: Avoiding deflation

Positive: Higher inflation makes it easier to avoid deflation, which may have harmful economic effects. This is a positive effect of inflation.

Positive or Negative Effect: Inflation makes it easier for prices to decrease/adjust

Positive: Inflation makes it easier for prices to adjust relative to each other. This is a positive effect of inflation.