Inflation is an important policy issue because it causes a redistribution of income and wealth, and discourages saving and investment.  Discuss how inflation affects various kinds of people like...

Inflation is an important policy issue because it causes a redistribution of income and wealth, and discourages saving and investment.  Discuss how inflation affects various kinds of people like borrowers and lenders.

Asked on by pamela0317

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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First, we should say that unexpected inflation is much more of an issue than inflation that is expected.  Borrowers, lenders, and others will be much less impacted by inflation that is anticipated.  I will discuss unanticipated inflation in this answer.

The main groups that are affected by inflation are borrowers and lenders.  Borrowers are helped by inflation while lenders are hurt by it.  When inflation occurs, money comes to be worth less.  If you borrow money today and pay it back a year later, the money that you are using to repay the loan will be worth much less than the money you borrowed.  This helps you as a borrower, but it hurts the lender who does not get as much value back.

Another group that is affected by inflation is people on fixed incomes.  When inflation occurs, the value of their income drops.  This means that they will not be able to buy as much with their income and will not have a very good chance of increasing the income to keep up with the inflation.

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