Chapter 13 Outline
III. EFFECTS OF INFLATION
A. The Redistribution of Income and Wealth
	1. Unanticipated inflation, inflation that is not expected, will redistribute income and wealth.
	a. Redistribution of income occurs because some wages and salaries increase more rapidly than the price level while other wages and salaries increase more slowly than the price level.
	b. Redistribution of wealth occurs because some asset prices increase more rapidly than the price level while other asset prices increase more slowly than the price level.
	2. One important redistribution of income and wealth that occurs during unanticipated inflation is the redistribution between debtors and creditors.
	a. Debtors gain from inflation because they repay creditors with dollars that are worth less in terms of purchasing power.
	3. Anticipated inflation, inflation that is expected, results in a much smaller redistribution of income and wealth.
	a. When inflation is anticipated individuals take actions to protect themselves from the effects of inflation.
	4. Inflation can decrease the production of goods and services.
	a. Because inflation erodes the purchasing power of money people devote more resources to reducing money holdings and fewer resources to the production of goods and services.
B. Inflation and Government
	1. Unanticipated inflation benefits government because government is a large debtor.
	2. Unanticipated inflation benefits government because government gains tax revenue as nominal income increases.
	a. The increase' in nominal income pushes people into higher tax brackets.
		1. To prevent this redistribution of income, the personal income tax system is now indexed; however, the rest of the federal tax system is not.
	3. Some argue that the benefits of inflation decrease government's incentive to vigorously pursue anti-inflationary policies.
C. Inflation and Net Exports
	1. Unanticipated inflation can cause net exports to fall.
	a. Inflation makes goods produced in the United States relatively more expensive, resulting in a decrease in exports.
	b. Inflation makes goods produced abroad relatively less expensive, resulting in an increase in imports.
D. Other Effects
	1. As the inflation rate increases and becomes more variable, more resources may be devoted to predicting inflation and fewer devoted to the production of goods and services.
	2. As the inflation rate increases and becomes more variable, firms may concentrate on short-term projects rather than long-term projects.
	3. As the inflation rate increases and becomes more variable, there may be speculation in real estate, gold, and art, caus'mg funds to flow away from investment in plant and equipment.
	4. As the inflation rate increases and becomes more variable, the nation's monetary system may disintegrate.

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