Explain inflation, and the difference between anticipated and unanticipated inflation.
Inflation is the persistent rise in the general price level in the economy.
1) If the rate of inflation is anticipated then people take steps to make suitable adjustments in their contracts to avoid the adverse effects which inflation could bring to them
2) Its effects are less substantial and less harmful
3) Effects of anticipated inflation are avoidable.
1) If the rate of inflation is unanticipated then people cannot make necessary adjustments in their contracts as they do not know what will be the rise in price level.
2) Its effects are more substantial and more harmful
3) Effects of unanticipated inflation are unavoidable.