Question

Determine if the people in the example have benefited (i.e., are winners) or have been harmed (i.e., are losers) by unexpected inflation.

Answer 1

Answer:

Winners

• The US Federal Government
• Joy

Losers

• Karen
• Herb
• 3rd National Bank

Explanation:

The US Federal Government is a Winner because Inflation in general has the effect of eroding the value of money. Generally interest rates account for this but when it is Unexpected Inflation they don't. The US government is a winner because the amount of debt they now have in real terms have decreased.

Joy is also a winner for the same reason as the US government.

Karen lost out as a result of this because her Fixed Pension does not change with inflation which means that when inflation rates go up unexpectedly she will be able to buy less goods and services.

Herb's money will lose real value as a result of inflation because like Karen, Herb will be able to buy less goods and services when inflation rises.

3rd National Bank will also lose out because they made loans that would not have accounted for Unexpected inflation. The real value that they will be owed will therefore be less and they will suffer 'real' losses.