📚 Learning Guide
Unanticipated Inflation Effects
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Arrange the effects of unanticipated inflation on different economic agents in the correct sequence: A) Borrowers experience a decrease in the real value of their debt, B) Lenders see a reduction in the purchasing power of their returns, C) Savers find their savings diminished in value, D) The overall economy adjusts to new price levels.

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Choose the Best Answer

A

A→B→C→D

B

A→C→B→D

C

C→B→A→D

D

B→C→A→D

Understanding the Answer

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Answer

Unanticipated inflation affects different groups in various ways. First, when inflation occurs unexpectedly, borrowers benefit because the real value of the money they owe decreases, making it easier for them to repay their debts. Meanwhile, lenders are hurt because the money they receive back has less purchasing power than when they lent it, reducing the value of their returns. Savers are also negatively impacted because their savings lose value over time due to rising prices, making it harder to buy what they need. Finally, as these changes happen, the overall economy must adjust to the new price levels, affecting all economic agents and leading to shifts in spending and investment behavior.

Detailed Explanation

When inflation happens unexpectedly, borrowers benefit first. Other options are incorrect because This order suggests that lenders are affected before savers; This sequence starts with savers, but it misses how borrowers benefit first.

Key Concepts

Unanticipated Inflation Effects
Economic Agents
Macroeconomic Policy Responses
Topic

Unanticipated Inflation Effects

Difficulty

medium level question

Cognitive Level

understand

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