Answer:
If the inflation rate were to rise suddenly, other things being equal, the correct answer would be:
b. Raises the CPI and reduces real income.
When inflation increases, the Consumer Price Index (CPI) rises, reflecting the general increase in prices of goods and services. As a result, the purchasing power of money decreases, leading to a reduction in real income. This means that the amount of goods and services that can be purchased with a given amount of money decreases.
Option a is incorrect because high inflation does not generally favor lenders over borrowers. In fact, lenders may be negatively affected by inflation because the value of the money they receive back (repaid by borrowers) is worth less in real terms than the amount they initially lent.
Option c is also incorrect because the impact of high inflation can vary among different individuals and groups. While some may be worse off, others may be less affected or even benefit in certain circumstances.
Option d is incorrect because high inflation does not necessarily reduce the nominal income of those with constant real incomes. Nominal income refers to the actual amount of money earned, while real income takes into account the purchasing power of that income. Inflation affects the real income by reducing its purchasing power, but it does not directly reduce the nominal income.
Step-by-step explanation: