Question

SECTION A: READ THE PASSAGE AND ANSWER QUESTIONS 1-3

Emma, a monthly salaried worker, received 1,300 cedis as her net salary; she heard that this year’s inflation is at 18%. This situation caused prices to soar so high that she complained about everything she buys. In the previous year she was able to buy herself, dresses, a basket of foodstuffs, a small bag of oranges, a dozen of drinks and her transportation. However, this year, she couldn’t afford the full bag of oranges but half,     and only 6 drinks after the other expenses.

1. From above, what is Emma’s nominal income?

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2. What is her real income?

               

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3. What is the difference between her real incomes for this year and last year?

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4. How much does Eyram need now to be able to have all the things she used to have previously?

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5. Eyram’s salary had increased by 200 cedis this year, with the inflation remaining same, would she still be able to purchase all the things she used to buy in the previous year?

Briefly explain your answer

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………………………………………………………………………………………………………

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6. Suggest three financial strategies that you believe if Emma could adopt can help her

Minimize the effect of the inflation on her living

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

SECTION A: READ THE PASSAGE AND ANSWER QUESTIONS 1-3

Emma, a monthly salaried worker, received 1,300 cedis as her net salary; she heard that this year’s inflation is at 18%. This situation caused prices to soar so high that she complained about everything she buys. In the previous year she was able to buy herself, dresses, a basket of foodstuffs, a small bag of oranges, a dozen of drinks and her transportation. However, this year, she couldn’t afford the full bag of oranges but half,     and only 6 drinks after the other expenses.

1. From above, what is Emma’s nominal income?

………………………………………………………………………………………………………

2. What is her real income?

               

………………………………………………………………………………………………………

3. What is the difference between her real incomes for this year and last year?

............................................................................................................................................................

4. How much does Eyram need now to be able to have all the things she used to have previously?

………………………………………………………………………………………………............

5. Eyram’s salary had increased by 200 cedis this year, with the inflation remaining same, would she still be able to purchase all the things she used to buy in the previous year?

Briefly explain your answer

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

6. Suggest three financial strategies that you believe if Emma could adopt can help her

Minimize the effect of the inflation on her living

………………………………………………………………………………………………………

………………………………………………………………………………………………………

………………………………………………………………………………………………………

Answer 1

Answer 1. Nominal Income can be defined as income before considering inflation effect i.e. net receivable without considering reducing effect in purchasing power due to inflation. Here, Nominal Income is 1300 cedis.

Answer 2. Real Income can be defined as income after considering effect of inflation i.e. income after taking into account reducing purchasing power due to inflation effect.

Here, Nominal income is 1300 cedis. Inflation rate is 18%. Therefore real income will be 1300 / ( 1 +inflation rate) = 1300 / (1 +0.18) = 1,101.6949 cedis

Answer 3. Difference betweenrealk income for two years. Difference in real income can be calculated as difference of current year real income and last year real income. Current year real income is 1,101.6949 and last year real income was 1,300 (assuming same income last year also). Difference will be = 1,300 - 1,101.6949 = 198.3051 cedis

Answer 4. Income gap determination In order to purchase same basket of goods as purchased during last year for 1,400 cedis, Emma needs to earn 234 cedis more i.e. total 1,534 (nominal income) for purchasing same basket. This amount is calculated as last year purchase price which is added with inflation cost (18%) i.e. 1,300 x 1.18 = 1,534 cedis

Answer 5. Financial strategies for reducing inflation effect: -

1. START INVESTING: - Money should not be kept idle in any situation. Keeping money even in saving bank a/c looses purchasing power as inflation rates are much higher than saving bank a/c interest. One should try to keep money invested so as to earn benefits of higher return. Also, even if one is risk averse, he/ she should try to invest some portion in equity market which have potential for huge earning( much higher than inflation rate) which will in turn reduce effect of inflation.

2. PLANNING OF PURCHASES DURING OFFER PERIOD: - One should try to wait and spend only during offer period i.e. time period when companies offer huge discount to clear their stocks. Scheduling purchases during offer period will enable oneself to reduce cost of purchases even during high cost perido and accordingly will reduce purchase cost.

3. FORMATION OF SMALL COOPERATIVE FOR CRAETING COST POOL EFFECT: - Purchasing a product at wholesale price will always be a cheaper option rather than purchasing it through a retailer. Purchasing goods at wholesale price will be cheaper option but will result in large quantity procurement. To deal with such large quantity procurement problem, one may form a small cooperative type organization with closed membership where all members will purchase goods together. This can lead to reduce cost of procurement thereby help in dealing with inflation.