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    Business Economics Qasim Masood SAP ID 21362

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    Qasim Masood
    Inflation impacts different groups in different ways at both the micro and macro levels. At the micro level, inflation redistributes income as some prices rise faster than others, benefiting those who can adjust incomes or are borrowers while harming those with fixed incomes. At the macro level, unanticipated inflation threatens economic output by increasing uncertainty and speculation. While anticipated inflation reduces these negative effects, few can accurately predict inflation so negative impacts persist. The statement that only the rich benefit from inflation is an overgeneralization, as some groups like flexible income earners, union workers, property owners and businesses can benefit in specific conditions, while borrowers benefit from unanticipated inflation reducing debt burdens.

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    Business Economics Qasim Masood SAP ID 21362

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    Qasim Masood
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    Inflation impacts different groups in different ways at both the micro and macro levels. At the micro level, inflation redistributes income as some prices rise faster than others, benefiting those who can adjust incomes or are borrowers while harming those with fixed incomes. At the macro level, unanticipated inflation threatens economic output by increasing uncertainty and speculation. While anticipated inflation reduces these negative effects, few can accurately predict inflation so negative impacts persist. The statement that only the rich benefit from inflation is an overgeneralization, as some groups like flexible income earners, union workers, property owners and businesses can benefit in specific conditions, while borrowers benefit from unanticipated inflation reducing debt burdens.

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    Assignment 21362 eco

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    Inflation impacts different groups in different ways at both the micro and macro levels. At the micro level, inflation redistributes income as some prices rise faster than others, benefiting those who can adjust incomes or are borrowers while harming those with fixed incomes. At the macro level, unanticipated inflation threatens economic output by increasing uncertainty and speculation. While anticipated inflation reduces these negative effects, few can accurately predict inflation so negative impacts persist. The statement that only the rich benefit from inflation is an overgeneralization, as some groups like flexible income earners, union workers, property owners and businesses can benefit in specific conditions, while borrowers benefit from unanticipated inflation reducing debt burdens.

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    25 views3 pages

    Business Economics Qasim Masood SAP ID 21362

    Uploaded by

    Qasim Masood
    Inflation impacts different groups in different ways at both the micro and macro levels. At the micro level, inflation redistributes income as some prices rise faster than others, benefiting those who can adjust incomes or are borrowers while harming those with fixed incomes. At the macro level, unanticipated inflation threatens economic output by increasing uncertainty and speculation. While anticipated inflation reduces these negative effects, few can accurately predict inflation so negative impacts persist. The statement that only the rich benefit from inflation is an overgeneralization, as some groups like flexible income earners, union workers, property owners and businesses can benefit in specific conditions, while borrowers benefit from unanticipated inflation reducing debt burdens.

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    Business Economics

    Qasim Masood
    SAP ID 21362
    Q1. Explain the Macro and Micro effects of Inflation. Give example in each
    case.

    Ans 1 Inflation is an increase in the average price level. Typically it’s


    measured by changes in a price index such as the Consumer Price Index (CPI). We
    can get a better sense of how inflation is measured by observing how the CPI is
    constructed. The process begins by identifying a market basket of goods and
    services the typical consumer buys.

    2. At the micro level, inflation redistributes income by altering relative prices,


    income, and wealth. Because not all prices rise at the same rate and because not all
    people buy (and sell) the same goods or hold the same assets, inflation doesn’t
    affect everyone equally. Some individuals actually gain from inflation, whereas
    others suffer a loss of real income or wealth.

    3. At the macro level, inflation threatens to reduce total output because it


    increases uncertainties about the future and thereby inhibits consumption and
    production decisions. Fear of rising prices can also stimulate spending, forcing the
    government to take restraining action that threatens full employment.

    3. Rising prices also encourage speculation and hoarding, which detract from
    productive activity.

    4. Fully anticipated inflation reduces the anxieties and real losses associated
    with rising prices. However, few people can foresee actual price patterns or make
    all the necessary adjustments in their market activity.
    2- Inflation benefits only rich. Evaluate the statement

    1. Some people are unaffected by inflation and others are actually helped by it.
    For the second group, inflation redistributes real income toward them and away
    from others.
    2. People who have flexible incomes may escape inflation’s harm or even
    benefit from it. Some union workers in the West also get automatic cost-of-living
    adjustments (COLAs) in their pay when the CPI rises, although such increases
    rarely equal the full percentage rise in inflation. Some flexible-income receivers
    and all borrowers are helped by unanticipated inflation. The strong product
    demand and labor shortages implied by rapid demand-pull inflation may cause
    some nominal incomes to spurt ahead of the price level, thereby enhancing real
    incomes. For some, the 3 percent increase in nominal income that occurs when
    inflation is 2 percent may become a 7 percent increase when inflation is 5 percent.
    As an example, property owners faced with an inflation- induced real estate boom
    may be able to boost flexible rents more rapidly than the rate of inflation. Also,
    some business owners may benefit from inflation. If product prices rise faster than
    resource prices, business revenues will increase more rapidly than costs. In those
    cases, the growth rate of profit incomes will outpace the rate of inflation.
    3. Unanticipated inflation benefits debtors (borrowers). Thus, inflation
    reduces the real burden of the public debt to the Federal government.
    4. Anticipated Inflation. The redistribution effects of inflation are less
    severe or are eliminated altogether if people anticipate inflation and can adjust
    their nominal incomes to reflect the expected price-level rises. The prolonged
    inflation that began in the late 1960s prompted many labor unions in the 1970s to
    insist on labor contracts with cost-of-living adjustment clauses. Similarly, if
    inflation is anticipated, the redistribution of income from lender to borrower may
    be altered. Suppose a lender (perhaps a commercial bank or a savings and loan
    institution) and a borrower (a household) both agree that 5 percent is a fair rate of
    interest on a 1-year loan provided the price level is stable. But assume that inflation
    has been occurring and is expected to be 6 percent over the next year. If the bank
    lends the household Rs100 at 5 percent interest, the bank will be paid back Rs105
    at the end of the year. But if 6 percent inflation does occur during that year, the
    purchasing power of the Rs105 will have been reduced to about Rs99. The lender
    will, in effect, have paid the borrower Rs1 for the use of the lender’s money for a
    year. The lender can avoid this subsidy by charging an inflation premium—that is,
    by raising the interest rate by 6 percent, the amount of the anticipated inflation. By
    charging 11 percent, the lender will receive back Rs111 at the end of the year.
    Adjusted for the 6 percent inflation, that amount will have the purchasing power of
    today’s Rs105. The result then will be a mutually agreeable transfer of purchasing
    power from borrower to lender of Rs5, or 5 percent, for the use of Rs100 for 1
    year.

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