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Chapter 9: Q.8 (page 242)

If inflation rises unexpectedly by 5%, would a state government that had recently borrowed money to pay for a new highway benefit or lose?

Short Answer

Expert verified

If inflation rises unexpectedly by 5%, the state government benefits.

Step by step solution

01

Step 1. Meaning 

The inflation rate is an increase in the price of goods and services over time that decreases the purchasing power of money.

02

Step 2. Explanation

With an unexpected rise of 5% in inflation, the state government would benefit because the tax revenue for the state government would be increased due to inflation, and also the loan would be repaid in a less valueable dollar than it borrowed.

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