2. Suppose people expect inflation equal to 3%, but prices rise 5%. Describe how this unexpectedly...

2. Suppose people expect inflation equal to 3%, but prices rise 5%.
Describe how this unexpectedly high rate of inflation would help or hurt the following:
a- The government
b- The owner of a home with a fixed interest mortgage.
c- A unionized worker in the second year of the employment contract.
d- A university that has invested part of its money in government bonds.

Solutions

Expert Solution

Assuming that inflation increases prices to 5%,but people expected prices to rise only upto 3%.

a.)The government:Inflation helps government in many ways.If prices are rised in the economy,then government will be benefited as it receives high revenue income.More income and taxes will be attained by government since people pay higher taxes to consume goods and services.Since government will be in profits,all the loans taken will be cleared.Therefore,inflation will be helpful for government.

b.)The owner of a home with a fixed interest mortgage:The owner of a home with a fixed interest mortgage will not be affected even if high inflation persist.Since fixed mortgages interest are constant and cannot be changed, it is not effected by inflation as there is no chance fto alter the interest rates on fixed deposits,fixed loans,fixed mortgages,etc.So,high inflation rates wouldn't hurt the owner of a home with fixed interest mortgage as he/she needs to pay the same interest rate as it is not affected by inflation.

c.)A unionized worker in the second year as per employment contract:If salaries of uniozed workers are decided by unions then it would be helpful for the employees as those unions would ask for maximum salaries if high inflation exists.But it hurts employees,if salaries are decided by administration or governments as employees cannot attain maximum salaries unless the administration or government decides to maximize it.In other case,if there is contract between employee and employer of paying fixed salary throughout the contract,then such salaries wouldn't be affected by inflation.If the administration or government constantly changes the salaries,then there are chances for employees to lose their jobs after completing the employment contracts.

d.)A university that has invested part of its money in government bonds:High inflation rates hurt university since the cost of government bonds will decrease.If inflation rises,then returns on bonds will increase but the worth of bonds would decline drastically.Hence,the university will be hurted or affected due to high inflation rate.Sudden rise in inlftaion leads to downfall of bond's worth.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Suppose that people expect inflation to equal 3%, but in fact prices rise by 5%. Describe...

Suppose that people expect inflation to equal 3%, but in fact prices rise by 5%. Describe how this unexpected high inflation rate would help or hurt the following: a. the government; (3%) b. a homeowner with a fixed-rate mortgage; (3%) c. a union worker in the second year of a labour contract; and (3%) d. a college that has invested some of its endowment in government bonds. (3%)

4. Suppose that people expect inflation to equal 3 percent, but in fact, prices rise by...

4. Suppose that people expect inflation to equal 3 percent, but in fact, prices rise by 5 percent. Indicate whether this unexpected higher rate of inflation would help or hurt each of the following groups. a homeowner with a fixed-rate mortgage. a union worker with a fixed labour contract a company that has invested some of its endowment in government bonds which pays a fixed rate of return. 5. Indicate how each of the following events would affect the aggregate...

Identify and contrast the differences between the rise in prices due to inflation and the rise...

Identify and contrast the differences between the rise in prices due to inflation and the rise in prices in microeconomic markets. Provide examples and explain your answer.

Suppose that the natural rate of unemployment equals 6%, and the public expect inflation to equal...

Suppose that the natural rate of unemployment equals 6%, and the public expect inflation to equal 4 %, and the coefficient a in PC equation = 0.4. What is the unemployment rate when the actual inflation equals 2%? What if the actual inflation rate equals 10%? During the 1990s, we observed the co-existence of low inflation and low unemployment. One of the arguments given by macroeconomists is that the expected inflation was lower than usual during the 1990s. Suppose now...

The lender and borrower expect inflation rates of 5% in 2019,4.5% in 2020, and 3%...

The lender and borrower expect inflation rates of 5% in 2019, 4.5% in 2020, and 3% in 2021. What is the geometric average of the expected inflation rates? If the lender requires a real rate of interest of 5%, what nominal rate would (s)he set for a 3 year loan (assume the loan is structured such that principle and interest are due in one lump sum at loan maturity)?

1. If inflation rises unexpectedly by 5%, indicate for each of the following whether the economic...

1. If inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected: (2 points) a. A union member with a COLA wage contract b. Someone with a large stash of cash in a safe deposit box c. A bank lending money at a fixed rate of interest d. A person who is not due to receive a pay raise for another 11 months

if inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor...

if inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected: a. A union member with a COLA wage contract b. Someone with a large stash of cash in a safe deposit box c. A bank lending money at a fixed rate of interest d. A person who is not due to receive a pay raise for another 11 months

Describe the relationships between inflation levels in prices and inflation levels for prices, wages and interest...

Describe the relationships between inflation levels in prices and inflation levels for prices, wages and interest rates with respect to their ability to affect people's economic status and business outcomes.

Question 2: Explain how inflation can redistribute income. Why does an unexpected rise in the inflation...

Question 2: Explain how inflation can redistribute income. Why does an unexpected rise in the inflation rate make workers and lenders worse off? Who is made better off? Why does correctly anticipated inflation does not have these distributional effects?

Suppose most investors expect the inflation rate to be 5% next year, 6% the following year,...

Suppose most investors expect the inflation rate to be 5% next year, 6% the following year, and 8% thereafter. The real-risk free rate is 3%. The maturity risk premium is zero for bonds that mature in 1 year or less and 0.1% for 2-year bonds; then the MPR increased by 0.1% per year thereafter for 20 years, after which it is stable. What is the interest rate on 1-, 10-, and 20- year treasury bonds? Draw a yield curve with...

Subjects