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Question: Explain why unanticipated inflation is considered more of a problem than anticipated inflation. (18 Marks)

Answer: Inflation is a rise in the general level of prices of goods and services in an economy over a period of time .When the general price level rises ,each unit of currency buys fewer goods and services .Consequently ,inflation also reflects an erosion in the purchasing power of money – a loss of real value of money .The rate of inflation can be measured using the annualized percentage change in a general price.
Anticipated inflation is when the rise in the general price level is the one ,or close to the one ,expected .When firms ,workers and government have correctly predicted the inflation rate ,they can take steps to protect themselves .For example ,trade unions may exercise their collective bargaining power to negotiate with employer for increases in money wages so as to protect the real wages of union members .Households can also switch their savings into banks which offer a higher r...(short extract)

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  • Subject: Economics
  • Course: Economics
  • Level: A-Level
  • Year: Not applicable
  • Mark: 100%
  • Words: 475
  • Date submitted: November 20, 2013
  • Date written: Not available
  • References: No
  • Document type: Essay*
  • Essay ID: 5206

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