The costs of unexpected inflation, but not of expected inflation, are: A) menu costs. B) the arbitrary redistribution of wealth between debtors and creditors. C) unintended distortions of individual tax liabilities D) the costs of relative price variability..

Answer: B) the arbitrary redistribution of wealth between debtors and creditors.

Inflation can impact the economy in various ways, whether it is anticipated or not. Expected inflation is when the general rise of prices over time is predicted by businesses and consumers, allowing them to make informed decisions and adjustments. However, when inflation is unexpected, it brings unforeseen consequences:

- Menu Costs: These are costs businesses incur when they have to change their prices often to keep up with inflation. While unexpected inflation may cause more frequent adjustments to pricing and therefore higher menu costs, expected inflation can also result in these costs if it is substantial enough that continuous price adjustments are necessary.

- Arbitrary Redistribution of Wealth Between Debtors and Creditors: Unexpected inflation erodes the real value of money. This means that the purchasing power of the money is reduced. For debtors who have borrowed money, this is beneficial because the real value of the debt they must repay is reduced. Conversely, creditors, or those who have lent money, find that they are repaid in dollars that are worth less than when they originally made the loan. Therefore, unexpected inflation causes an arbitrary redistribution of wealth, benefiting debtors at the expense of creditors.

- Unintended Distortions of Individual Tax Liabilities: This refers to the effects of inflation on taxation. In many tax systems, inflation can push taxpayers into higher tax brackets or reduce the value of tax allowances. However, these effects can also occur with expected inflation if the tax system is not indexed to inflation.

- The Costs of Relative Price Variability: Inflation, particularly when unexpected, can lead to deviations in the relationship between different prices, as some prices adjust faster than others. This makes it more difficult for consumers and businesses to make informed decisions and can lead to misallocation of resources. Although relative price variability can occur with expected inflation, unexpected inflation exacerbates the issue because the price changes are not anticipated.