AP Macroeconomics 2.5: Costs of Inflation

Explain how unexpected inflation or deflation redistributes wealth between borrowers and lenders and affects people on fixed incomes.

[Maximum number: 2]

The table provided shows the quantity and price of food and clothing, the only two goods produced and consumed in the country of Maltrose, in year 1 and year 2. Assume that year 1 is the base year.

Table for Question MEA-1.H—Explain the costs that unexpected inflation (deflation) imposes on individuals and the economy question 1 — AP Macroeconomics

(a)

Assuming that the expected inflation rate between years 1 and 2 was 3%, were each of the following better off, worse off, or unaffected as a result of the economic conditions between year 1 and year 2 ?

[ 2 ]

(i)

People living on a fixed income

[ 1 ]

(ii)

Borrowers with fixed interest-rate loans. Explain.

Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.

[ 1 ]

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MEA-1.H—Explain the costs that unexpected inflation (deflation) imposes on individuals and the economy question 1

Question (a)

Question (i)

Question (ii)