Question

Which of the following is a definite consequence of a high inflation rate? group of answer choices

O it reduces everyone's real wealth and real income.
O it makes borrowing more expensive.
O it makes poor people worse off.
O it can distort price signals.

Answer 1

A high inflation rate can distort price signals, adversely impacting the economy by complicating market efficiency and making long-term planning difficult.

Step-by-step explanation:

The definite consequence of a high inflation rate is that it can distort price signals. High inflation muddles short-term pricing, impacting market efficiency, and confuses long-term savings and investment decisions.

During periods of high inflation, cash and financial assets that do not keep pace with inflation rates lead to a negative real rate of return. For example, if someone has a bank account with an interest rate of 4%, but inflation rises to 5%, their real rate of return is effectively -1%. Inflation can benefit those with debts by allowing them to repay in less valuable dollars, but it can also harm others by reducing the real value of their financial assets.

Overall, high inflation complicates economic planning and causes unintended redistributions of purchasing power, making it problematic for individuals and businesses alike.