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. One important redistribution of income and wealth that occurs during unanticipated inflation is the redistribution between debtors and creditors. Debtors gain from inflation because they repay creditors with dollars that are worth less in terms of purchasing power. Anticipated inflation, inflation that is expected, results in a much smaller redistribution of income and wealth. When inflation is anticipated individuals take actions to protect themselves from the effects of inflation.
Inflation can decrease the production of goods and services.
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. Unanticipated inflation benefits government because government gains tax revenue as nominal income increases. The increase' in nominal income pushes people into higher tax brackets.