Many economists agree that the long-term effects of inflation depend on the money supply. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed. A. In his post-meeting press conference, Powell highlighted the role of inflation expectations in the Feds deliberations. For example, the bank expects a real return of. When actual inflation is less than expected inflation. 14) Suppose the working-age population of a fictional economy falls into the following categories: 90 are retired or homemakers; 60 have full-time employment; 20 have part-time employment; 16) Suppose you borrow $1,000 at an interest rate of 12 percent. ", International Monetary Fund. D) everyone is worse off from unexpected inflation, The right answer is option B.the borrowers gain and the If the actual and expected inflation rates turn out to be the borrowers lose and lenders gain. 45. B. In response to these developments, the committee decided that a larger increase in the target range was warranted at todays meeting. (A few days before he spoke, the University of Michigans preliminary reading on five to ten year inflation expectations for June had moved up to 3.3 percent, a bit higher than the 2.9 to 3.1 percent range in which it had been. Direct link to Eileen Preston's post What about producers of p, Posted 5 years ago. The decision left its 2 percent inflation target intact. when the price level increases at a faster pace than expected; for example, if you think that the rate of inflation will be 5%, but it turns out to be 8%. Before accessing the answer provided you should first Question 3 the borrowers gain and the lenders lose. The second key premise is that central bank behavior and possibly central bank communications can influence inflation expectations and through them macroeconomic outcomes. If, on the other hand, the public reacts to a short period of higher-than-expected inflation by marking up their long-run expectation considerably, then expectations are poorly anchored., If everyone expects the Fed to achieve an inflation rate of 2 percent, then consumers and businesses are less likely to react when inflation climbs temporarily above that level (say, because of an oil price hike) or falls below it temporarily (say, because of a recession). Suppose that the data in the table reflect price levels in the economy. 23) In 2013, Kendall Ford, an automobile dealership, spent $20,000 on a new car lift for its repair shop, $2,000 on a new copy machine for its sales division, and $600,000 on Ford Motor company When actual inflation is less than expected inflation A. borrowers lose and lenders gain. The change makes explicit that, following a period in which inflation has fallen short of target for a time, the Fed will accept and even encourage periods of above-2 percent inflation going forward, discouraging a decline in inflation expectations. A. B) 105.1. portion of inflation or deflation that is unanticipated leads to "Money and Inflation: Some Critical Issues. Default is the failure to repay a debt, including interest or principal on a loan. If you're seeing this message, it means we're having trouble loading external resources on our website. when the real value of wealth is transferred from one agent to another; when inflation is higher than borrowers and lenders expected, wealth is transferred from lenders to borrowers. For example, imagine that tomorrow, every persons bank account and salary doubled.
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