Question

Who benefits the MOST during periods of unexpected inflation?

Answer 1

The fourth question is correct (D).

To understand this answer, one must understand the mechanism of correction of inflationary processes.

Inflation erodes the purchasing power, thus, the elderly with fixed income will be harmed and not beneficiaries in an inflationary process.

The main mechanism to reduce inflation is the interest rate. In this way, when inflation happens, the Federal Reserve raises the interest rate. This makes public bonds profitable and economic agents begin to use money by buying bonds, reducing the circulation of money and consequently lowering inflation.

For banks that have made adjustable rate loans, this will be a good thing, as interest on the contracts will increase along with the increase in the interest rate, which will make the contracts yield more. Therefore, banks will be the biggest beneficiaries. However, this will happen only when the rate is adjustable.