Answer to Question #211796 in Macroeconomics for Riya

Question

Explain the cost of unexpected inflation

Answer 1

The cost of unexpected inflation refers to inflation that is lower or higher compared to what is expected. Unexpected inflation affects the business cycle. It reduces the effectiveness of economic agents’ market price information. Over the years, unexpected inflation has affected employment, investment and income. 

 Generates high risk premiums and economic uncertainty. Because of greater uncertainty, lenders demand a premium to compensate for the uncertainty. This will lead to higher borrowing costs, hence reducing economic activity since it will hinder investment.