How would this Unexpected Change of Inflation Help or Hurt the Following
1)Â Â Â The federal government;
If the price has exchange unexpected, the level of price had increased dramatically. It means that the purchasing power of money would decline. Suppose the interest rate unchanged, so the return on investment bond would not change, then the federal government could pay less real money to the investor who has invested in Treasury bonds. In this respect, the unexpected change of inflation is beneficial (David ,2000).
However the unexpected change will have serious affect on the development of economic. On the one hand, the unexpected inflation will cause the price signal distortion, which would mislead producers. As the result, it may result in abnormal development of the national economy and the unbalance of the entire structure, so as to the industrial structure and economic structure. It is a bad news for the federal government. It will have pressure from many aspects. When the inflation was caused by the deformity of the economic structure, the federal government is bound to take various measures to curb the inflation. The result will lead to a significant decline in production and construction. Therefore, unexpected inflation does not help the economy stable and political stable (Mashiko, 1996).
2)Â Â Â a homeowner with a fixed-rate mortgage
On the one hand, since the inflation, the nominal interest rate will increase. If the homeowner loan before the deflation with a fixed-rate, it means the homeowner could pay less real money than before. It is beneficial to the homeowner. However, if the homeowner loan after the deflation with a fixed-rate, because the nominal interest rate higher than before, the homeowner have to pay more than before. It is hurt to the homeowner (Sullivan, 2003).
On the other hand, the deflation means the increase of price of goods. The nominal value will also increase. It means that the homeowner earn more than before nominally. So, in this aspect, the deflation is helpful for the homeowner.
3) A private school that has invested some of its endowment in Treasury bonds.
Because of the inflation, the nominal interest rate will increase. While the return rate of treasury bonds would not change, it means that this private school may receive less real money than before. It is hurt to the private school when it invested in treasury bonds with their endowment. The private school have less real money to pay the endowment in the future.
