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Chapter 20: Problem 3

Which is a greater problem: anticipated inflation or unanticipated inflation? Briefly explain.

Short Answer

Expert verified
Unanticipated inflation is generally considered to be a greater problem than anticipated inflation due to the uncertainty it introduces into the economy, which discourages investment and consumption.

Step by step solution

01

Understanding Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and consequently, purchasing power is falling. There are two types of inflation: anticipated and unanticipated. Anticipated inflation is when people can predict the rise in prices and can adjust their behaviors accordingly. Unanticipated inflation is when inflation arises without warning. It is important to understand these two types of inflation before comparing them.
02

Impacts of Anticipated Inflation

In an economy where inflation is anticipated, individuals, businesses, and the government can make adjustments to their financial decisions based on the expected rise in prices. For example, salary contracts could be negotiated with inflation in mind, or prices of goods and services could be adjusted. Hence, the negative effects are reduced but there is still a cost associated with such adjustments.
03

Impacts of Unanticipated Inflation

Unanticipated inflation is usually seen as a greater problem because it introduces uncertainty into the economy. This can cause businesses to delay investment and hiring, which slows economic growth. Consumers may also decrease spending if they are unsure about future prices, which can lead to a decrease in overall demand for goods and services and subsequently a fall in production.
04

Comparing Anticipated and Unanticipated Inflation

Given the impacts of both types of inflation, it can be concluded that while both types of inflation have their disadvantages, unanticipated inflation is generally more problematic due to the uncertainty it introduces into the economy.

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Most popular questions from this chapter

An article in the Wall Street Journal noted that over a fourmonth period in late 2014 , employment in the state of Georgia "rose \(1 \%\) even as the state's jobless rate climbed 1.2 percentage points." Briefly explain how the state's unemployment rate could have increased at the same time that employment in the state was increasing.

What effect does the payment of government unemployment insurance have on the unemployment rate? On the severity of recessions?

(Related to the Don't Let This Happen to You on page 681 ) An article in the Wall Street Journal asked "How can inflation be low when everything is so expensive?" The article also noted that "the CPI shows that prices are the highest they've ever been." Is there a contradiction between a low inflation rate as measured by the CPI and the observations that prices are "the highest they've ever been" and everything is "so expensive"? Briefly explain.

What are the problems in measuring the unemployment rate? In what ways does the official BLS measure of the unemployment rate understate the true degree of unemployment? In what ways does the official BLS measure overstate the true degree of unemployment?

The BLS defines a job quit as a "voluntary separation initiated by an employee." The BLS estimated that there were 3.1 million job quits in March 2017 a. Economists distinguish three types of unemployment: frictional, structural, and cyclical. How would you classify unemployment caused by an increase in job quits? b. Would an increase in the number of job quits suggest that it was becoming easier or more difficult for people to find jobs? Briefly explain.
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