Effects of unanticipated inflation?

Question

Explain how some individuals are helped and others harmed by unanticipated

inflation as they participate in each of the following markets.

(a) Credit markets

(b) Labor markets

(c) Product markets

Answer 1

(a) - Borrowers will be in winning situation but lenders will be loosing part of profits because bigger part of nominal interest rate will be consumed by inflation.

(b) - Employers will benefit because they will need to pay lower real wages but workers will be in loosing situation because they will receive lower real wages (thus their purchasing power will relatively fall).

(c) - Depends on type of model you apply here, for sticky price model suppliers will loose profits because they will be pressed to sell by old nominal price thus real revenue will fall (though depends on which real demand curve segment they were elastic/inelastic). Customers will be winners in this situation because they will pay lower real price (but if these customers are workers who receive lower wages net effect could be sometimes different).

All in all on average there will no be any loosers/gainers due to unexpected inflation except that this inflationary volatility may reduce economic efficiency and stability in economy and create some imbalances.