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

Expert Solution

(A) In this case. the union member is protected for an unexpected hike of 5% in inflation rate. The COLA ensures that the wage rate must be adjusted with the inflation rate. So, the union member is helped in this case due to the presence of COLA in wage contract.

(B) In this case, the unexpected inflation will reduce the value of large stash of cash in a safe deposit box because the saved money is not earning interest or not invested somewhere. It is lying idle in a safe deposit box. So, a rise in inflation would reduce the value of savings kept in safe deposit box. The economic agent will be hurt by an unexpected inflation.

(C) In this case the bank will be hurt by an unexpected inflation rate because it will reduce its real earning from interest charged on loan. The real interest payments on loan will reduce due to inflation. It will hurt bank.

(D) He remains unaffected in the sense that he is not entitled to receive the pay. However as a consumer, he gets hurt because if he uses his savings for consumption (as he is not receiving his salary as of now), a rise in inflation would deplete his savings at a faster rate. So, he would be hurt.

Rahul Sunny answered 1 year ago

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

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

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