Which of the following statements about inflation is not true?

Question

a. An increase in inflation increases nominal interest rates.
b. Unanticipated inflation redistributes wealth.
c. Inflation reduces people's real purchasing power because it raises the cost of the things people buy.
d. If there is inflation, taxing nominal interest income reduces the return to saving and reduces the rate of economic growth.

Answer 1

The statement that is not true is:

a. An increase in inflation increases nominal interest rates.

While it is often the case that central banks may raise nominal interest rates in response to rising inflation, the relationship is not always straightforward. Inflation expectations can influence nominal interest rates, but they do not necessarily increase in every scenario of inflation, particularly in the short term or if nominal rates are already at a lower bound. Therefore, this statement requires more context to be universally true.