Question

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

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

One definite consequence of high inflation is that it can distort price signals, causing market inefficiencies and issues with long-term planning. It may also cause redistributions of purchasing power and decrease real wealth when inflation outpaces the return on investments and interest rates.

Step-by-step explanation:

Consequences of High Inflation Rate

One definite consequence of a high inflation rate is that it candistort price signals. High rates of inflation can cause confusion in the economy because prices do not only reflect the values of goods and services but also the overall level of inflation. This complication may prevent market forces from operating efficiently and can significantly cause issues for long-term savings and investment decisions.
Rising inflation rates can lead to unintended redistributions of purchasing power, hurting those who have financial assets with returns that do not keep up with the rate of inflation. For instance, a person with a bank account accruing 4% interest will experience a negative real rate of return if inflation rises to 5% since the nominal return does not compensate for the loss of purchasing power.

Additionally, high inflation can decrease real wealth and negatively impact confidence in a country's economic management. This is primarily because the real value of debt decreases, allowing governments to repay their fixed-rate debts with less valuable currency if inflation exceeds the rate they've borrowed at.