Why is the difference between the actual and expected rates of inflation important for explaining inflation?
What will be an ideal response?
When the actual rate of inflation is higher than the expected rate of inflation, profits temporarily rise because prices that firms charge for their products are rising faster than wage rates. (The nominal wage rates were based on a lower expected rate of inflation than actually exists.) With more revenues, firms can afford to employ more workers so the unemployment rate temporarily falls. In the long run, firms and workers adjust their expectations to the new higher rate of inflation. This means that there will be an increase in the nominal wages rate, so the profits decrease. The firm cannot afford to hire as many workers so some workers get laid off. The unemployment rate rises and returns to its natural rate.
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Which of the following is not a usual consequence of inflation?
A) Income is redistributed among people. B) People are misled into supposing that their earnings have risen substantially. C) People believe that rising prices have made them worse off. D) The cost of living goes up for everyone. E) The value of money falls.
Which household characteristic has the largest effect on household income distribution?
A) the size of the household B) the age of householders C) the race of household members D) the level of educational attainment of household members