Which of the following is a result of unanticipated inflation?

• A. It redistributes wealth from lenders to borrowers.
• B. It makes fixed-income recipients better off.
• C. It increases the real value of money held by the public.
• D. It has no effect on purchasing power.

Answer: (A)

Verified step by step guidance

1. Understand the concept of unanticipated inflation: it occurs when the actual inflation rate is higher than what people expected.
2. Recall that inflation reduces the real value of money over time, meaning that money repaid in the future is worth less in purchasing power than when it was lent.
3. Analyze the impact on lenders and borrowers: lenders receive money back that has less purchasing power, while borrowers repay their debts with money that is worth less than anticipated.
4. Recognize that this redistribution benefits borrowers at the expense of lenders because the real value of the debt decreases.
5. Conclude that unanticipated inflation redistributes wealth from lenders to borrowers, rather than making fixed-income recipients better off or increasing the real value of money.