1. if you owe money to a bank. Will you gain or lose from an unanticipated decrease in inflation?2....

Question

1. if you owe money to a bank. Will you gain or lose from an unanticipated decrease in inflation?
2. How could inflation make people turn to exchange by barter?
3. What impact will free trade have on economic growth?
4. True or False: Increasing the capital stock will lead to economic growth? Explain.

David · Accepted Answer

1) An unanticipated decrease in inflation means that the value of domestic currency will 
now worth more. This implies that the amount one must pay back on his / her loan will be 
worth more than his / her expectations. This will increase the real interest rate to be paid 
on that loan, though the nominal rate has not changed. This will make the person worse 
off.
2) During times of inflation, people suffer because value of currency falls. At times of 
inflation, lower amount of goods and services are available for the same amount of 
money as before. This people incur losses from holding money. But if barter system 
prevails instead of monetary exchange system,

1. if you owe money to a bank. Will you gain or lose from an unanticipated decrease in inflation? 2. How could inflation make people turn to exchange by barter? 3. What impact will free trade have on...

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