Question

what are the effects of rapid inflation? check all that apply.
interest rates increase.
banks loan more money.
unemployment declines.
uncertainty increases.
real income declines.

Explanation:

• Interest rates increase: Central banks often raise interest rates to combat inflation, so this is an effect.
• Banks loan more money: During rapid inflation, the real value of money to be repaid decreases, so banks are less likely to loan more (they face higher risks of not getting real value back), so this is incorrect.
• Unemployment declines: In the short - run, according to the Phillips curve, inflation can be associated with lower unemployment as businesses expand production, so this can be an effect.
• Uncertainty increases: Rapid inflation makes it hard for businesses and individuals to plan (e.g., pricing, investment, wage negotiations), so uncertainty rises.
• Real income declines: If prices rise faster than nominal income, the real (purchasing power) of income falls.

Answer:

A. Interest rates increase, C. Unemployment declines, D. Uncertainty increases, E. Real income declines