Daily Review -- Sample MC Questions

Q.  Which of the following are harmed by unexpectedly high rates of inflation?  


I.    Borrowers repaying a long-term loan at a fixed interest rate.  
II.   Savers who have put their money in long-term assets that pay a fixed interest rate.  
III.  Workers who have negotiated cost-of-living raises into their contracts.
IV.  Persons living on fixed incomes.

1. I and III only
2. II and III only
3. II and IV only
4. I, II, and IV only
5. II, III, and IV only

This question was taken from AP Macroeconomics Practice that I think is Eric Dodge's 5 Steps to a 5 workbook that is posted online.  My answer to the above question is C.  That is, savers are hurt because their real balances buy less and fixed income earners are hurt too for the same reason.  

Unanticipated inflation catches the economy off guard and redistributes the gains from trade.  In this case the gains are transfered from the creditors to the debtors in the first case.  In the second case, people living on fixed income have to make new consumption choices which means delaying the purchase of new durable goods and buying inferior goods.  

I write the Daily Review to keep my mind sharp and to give my students an edge when taking the AP exam.  A FREE app is here.  Look for my new app, Bottleneck, soon.