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Explain how inflation can have redistributive effects in the economy.

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Explain how inflation can have redistributive effects in the economy. Do you think the Federal Reserve over-emphasizes inflation as a policy concern? Why, or why not?

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Solution Summary

The solution explains how inflation can have redistributive effects in the economy.

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Here is a great article summarizing these issues:
http://www.sasconsulting.ca/Files/Economics_Inflation_Essay.pdf
Here is a more academic source:
https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=CEF2010&paper_id=398

In terms of redistributive effects:

Inflation means higher prices. But of course, this extra money changes hands - where does it go? Those with high debt gain. This is because the value of their debt has fallen. Creditors, of course, lose, since what they are owed has less value.

Now, as far as manufacturers are concerned, it is a bit more complicated. The price rises of inflation are fairly rapid. But the rise in prices for raw materials or labor are fairly slow. This means, for a time, manufacturers are making larger profits, since their average price is going up while their materials (etc) are remaining the same.

It should also be noted that inflation can ...

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