Question 19 Which of the following is a danger of inflation? (1) Anticipated inflation may be greater than unanticipated inflation. (2) High rates of inflation will reduce interest rates. (3) Price changes can affect the people who sign long-term contracts. (4) Rapid price changes reduce uncertainty.

The danger of inflation primarily revolves around how it disrupts economic stability and contractual agreements. Let's evaluate each option: 1. **Anticipated inflation may be greater than unanticipated inflation.** - **Incorrect.** Typically, **unanticipated inflation** is more problematic because it catches individuals and businesses off guard, leading to greater economic distortions. **Anticipated inflation** allows for adjustments in contracts, wages, and prices, thereby mitigating some negative effects. 2. **High rates of inflation will reduce interest rates.** - **Incorrect.** According to the **Fisher Equation**, nominal interest rates are approximately the sum of real interest rates and expected inflation. Therefore, **higher inflation rates generally lead to higher nominal interest rates**, not lower. 3. **Price changes can affect the people who sign long-term contracts.** - **Correct.** One of the significant dangers of inflation is its impact on long-term contracts. **Fixed nominal contracts (like loans or leases)** can become disadvantageous when unexpected inflation occurs, as the real value of payments may decrease, harming lenders or other parties involved. 4. **Rapid price changes reduce uncertainty.** - **Incorrect.** **Rapid price changes actually increase uncertainty** in the economy. When prices fluctuate unpredictably, it becomes challenging for businesses and consumers to make informed financial decisions, leading to reduced economic stability. **Conclusion:** The correct danger of inflation among the given options is: **(3) Price changes can affect the people who sign long-term contracts.**