Inflation can benefit either the lender or the borrower, depending on the circumstances. For example, companies are more likely to grow their business when they know what their costs will be in the years ahead. U if it is uncertain if the person or group is affected by inflation Then explain why you answered … How to calculate GDP deflator? Grade: 11 Lesson # 7 Who Benefits and Who does not Benefit from Unanticipated Inflation? Savers. H if the person or group is hurt by inflation. Those who might be hurt by inflation The consumers: When the price of commodities increases, the consumer is forced to pay more for goods and services, which he or she could get at a lower price. People with assets like gold, property or stocks benefit from inflation because it increases the value of their assets. Inflation occurs when there is a general increase in the price of goods and services and a fall in purchasing power. An extreme example would be in the case of hyperinflation. For example, in periods of hyperinflation, people who had saved all their life could see the value of their savings wiped out because, with higher prices, their savings are effectively worthless. Inflation also makes planning for the future more difficult, so businesses are less likely to take risks. For example, if the price of a television increases from $1,500 to $1,600 due to inflation, the lender makes more money because 10% interest on $1,600 is more than 10% interest on $1,500. No risk means no advancement which stifles the entire economy. the incidence of inflation: or who gets hurt? In practice, all persons are unable to anticipate and predict the rate of inflation correctly so that they cannot adjust their economic behaviour accordingly. Failure to anticipate inflation correctly leads to redistribution of income and wealth. In this lesson summary review and remind yourself of the key terms and calculations used in describing the costs of inflation. Next come the borrowers. Inflation enables adjustment of relative prices. Debtors benefit from inflation because they borrowed relatively more valuable dollars and are able to pay off their debt with “cheaper dollars”. This is because the borrower still owes the same amount of money, but now he or she has more money in his … Earn Transferable Credit & Get your Degree, Get access to this video and our entire Q&A library. Before long, inflation would cause the real value of our money to return to its previous levels. Services, Effects of Inflation on Suppliers and Demanders, Working Scholars® Bringing Tuition-Free College to the Community. In other words, the money supply has a direct, proportional relationship with price levels in the long-term. Who Inflation Hurts the Most ... Young families buying and furnishing a home benefit from housing affordability that's the best it's been in decades. On top of this, the higher prices of those items earn the lender more interest. If wages increase with inflation, and if the borrower already owed money before the inflation occurred, the inflation benefits the borrower. - [Tutor] What we're going to do in this video is talk more about inflation and deflation, which we've talked about in other videos, but we're gonna talk about it in the context of who benefits and who gets hurt, especially in a situation where people are lending money to each other at … Who benefits from inflation and who gets hurt by inflation? SS.912.FL.3.2Examine the ideas that inflation reduces the value of money, including savings, that the real interest rate expresses the rate of return on savings, taking into account the effect of inflation and that the real interest rate is calculated as the nominal interest rate minus the rate of inflation. The money supply has a direct, proportional relationship with price levels; If the currency in circulation increases, there is a proportional increase in the price of goods. Inflation is defined as the persistent increase in prices of general goods and services in the economy, for a specified time. It provides lenders with increased borrowers since the latter would require more credit. In the inflationary outcome the rich end up essentially subsidizing the poor because the poor would otherwise have no income. On a small scale lenders are the losers from inflation and borrowers are the winners but on a bigger scale the biggest beneficiary is the Government and the overall economy is the biggest loser. People closer in the receiving line to the newly created money benefit the most. Thus, increasing the supply of money increases the price levels. Thus, if the currency in circulation increases, there is a proportional increase in the price of goods and services. 5. Those … Continue reading Inflation – who benefits? Aggregate demand is the total amount of goods and services demanded in the economy at a given overall price level at a given time. First, higher prices mean that more people want credit to buy big-ticket items, especially if their wages have not increased–this equates to new customers for the lenders. Become a Study.com member to unlock this Who benefits from inflation and who gets hurt by inflation? Inflation occurs when there is a general increase in the price of goods and services and a fall in the purchasing value of money; it can benefit both borrowers and lenders depending on the circumstances. Purchasing power is the value of a currency expressed in terms of the number of goods and services that one unit of the currency can purchase. If prices rise, the value of money falls, and the real value of savings decline. Example would be property with a mortgage. © copyright 2003-2020 Study.com. Inflation is measured by the inflation rate, which can be computed using the Consumer Price Index (CPI) or GDP deflator. 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