Final answer:
Unexpected inflation disproportionately costs those whose income does not rise with inflation, while debtors benefit from repaying loans with devalued dollars. It leads to a redistribution of purchasing power, with savers seeing their money's value decline in real terms. The correct answer is option a. Unexpected inflation has a greater cost for those who borrow than those who save.
Step-by-step explanation:
The statement that best describes how the cost of unexpected inflation is distributed is that unexpected inflation has a greater cost for those whose wages do not increase with inflation, rather than for those who are paid a fixed nominal wage. Those who borrow money also tend to benefit, as they can repay their debts with dollars that are less valuable. Inflation causes unintended redistributions of purchasing power, hurting those with financial assets that do not keep pace with the rise in inflation, such as money held in a savings account with a fixed interest rate lower than the inflation rate.
For example, if a person has a bank account with an interest rate of 4%, but inflation rises to 5%, the real rate of return on their savings would be -1%, leading to a decrease in their purchasing power. On the other hand, debtors benefit as they repay their loans with money that has lesser value than when they borrowed it. Consequently, unexpected inflation can complicate future planning and may blur price signals, making it difficult to make informed economic decisions.