Chapter 14, Problem 2CYU

To determine

The question requires us to determine the impact of inflation.

Explanation of Solution

Inflation indicates an increase in the general prices of goods and services in a market. Lenders, savers, and individuals with fixed incomes are hurt by the inflation while borrowers gain from the inflation.

If inflation stops completely for years or equals zero percent then the rate of expected inflation would be higher than the actual inflation rate in the market. Banks and lenders will get a higher return on their loans due to higher real interest rates. Borrowers would be required to pay back their debts with money that was more valuable in real terms than they had anticipated.

Inflation changes the purchasing power of consumers. If inflation remains zero, the consumers’ would enjoy the same purchasing power and get the goods and services at the same price for a long.