High and unexpected inflation has a greater cost for which of the following groups?

• A. Firms that can easily adjust prices
• B. Individuals with fixed nominal incomes
• C. Borrowers with variable-rate loans
• D. The government collecting income taxes

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of inflation and its effects on different economic agents. Inflation refers to the general increase in prices over time, which reduces the purchasing power of money.
2. Step 2: Recognize that 'unexpected inflation' means inflation rates are higher than what people anticipated, causing distortions in economic decisions and wealth distribution.
3. Step 3: Analyze how inflation affects each group: Firms that can easily adjust prices can pass on higher costs to consumers, so they are less hurt by inflation.
4. Step 4: Consider individuals with fixed nominal incomes, such as retirees on fixed pensions. Since their income does not increase with inflation, their real purchasing power declines, making them worse off.
5. Step 5: Evaluate borrowers with variable-rate loans and the government collecting income taxes. Borrowers may benefit if inflation reduces the real value of their debt, and governments may experience bracket creep but can adjust tax policies. Therefore, individuals with fixed nominal incomes bear the greatest cost.