True or false: If both the potential lender and the potential borrower correctly anticipate the rate of inflation, inflation will not redistribute wealth from the creditor to the debtor. Explain.
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‘Inflation’ refers to an increase(↑) in the ‘general price level’. It occurs when ‘money supply’ is more than the available ‘goods and services’. In other words, ‘Inflation’ is not high prices(P), rather it is a period of “rising prices”. A small rise in price(P) is not considered as ‘inflation’.
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- Which of the following groups is protected from a sudden increase in inflation? a) Borrowers who have loans at fixed interest rates.b) Fixed-income groups.c) Workers who receive fixed wages under the multiyear contracts.d) People who rent their homes under short-term lease agreements in comparison to those who own theirhomes.Which of the following is the positive impact of inflation? A) Inflation causes the real value of saving for a saving person to eroded. B) Inflation makes debtors pay less in real return. C) Fixed-income people have the same income but a high cost of living. D) lender will not have the option to earn interest.Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected.Is the real interest rate on this loan higher or lower than expected?Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain or lose?Inflation during the 1970s was much higher than most people had expected when the decade began. How did this affect homeowners who obtained fixed-rate mortgages during the 1960s? How did it affect the banks that lent the money?
- Can the issuance of government securities reduce the expectation of inflation?Why a negative inflation (i.e., deflation) is worse than inflation?Mark Lai, a student of agricultural science in the developing country Mikatra, notes that the demand for rice increased substantially over the last ten years. He attributes this to the substantial growth in population during this period. Although rice cultivation in Mikatra is still labor-intensive, Mark observes that the inflation-adjusted wages for farm workers in the rice industry have more or less remained constant during this period, even though the supply of rice increased. This was contrary to Mark's expectations as inflation in Mikatra during this period was not very high. Which of the following, if true, is most likely to explain this outcome? A.Rice and other cereals form a smaller proportion of the food budget of higher-income individuals. B.The government of another major rice-producing country, Langun, subsidizes its rice farmers to keep its prices competitive in the global market. C.The government of Mikatra has recently set a price floor in the wheat market. D.Following…
- recently read an article that concluded that, when adjusted for inflation, paychecks today have nearly the same purchase power as they did 40 years ago. As a layperson, I take this to mean that, while the ordinary American's standard of life hasn't increased in several decades, it hasn't deteriorated either. I'm struggling to reconcile this figure with the "shrinking middle class" and the need for people to work several jobs to make ends meet, both of which have progressively evolved over the same 40-year period. I assume the answer is growing housing, school, and healthcare costs, but aren't these things factored into the inflation adjustment calculation?Suppose all wages, salaries, welfare benefits, and other sources of income were indexed to inflation. Would inflation still be considered a problem? Why or why not?Suppose I lend my friend Peter $100 for one year, and he agrees to repay me with interest. We each have an expectation that the inflation rate over the coming year will be 5 percent, and so we agree that he will pay me back at a nominal rate of 7 percent interest. a) What real rate of return do I expect to receive? b) What happens if inflation turns out to be 8 percent over the year? Who is made better off and who is made worse off? c) What happens if inflation turns out to be 3 percent over the year? Who is made better off and who is made worse off?
- Suppose the Australia Bureau of Statistics indicated that the Consumer Price Index (CPI) increased to 103.2 in 2019 from 104.5 in 2018. Use this information to answer the following questions: Calculate Australia’s inflation rate in 2018. Suppose Singh borrowed money from a bank in 2017. Identify the party who would gain from the financial situation in Australia. The Department for Jobs and Small Business of Australia published the following information in 2020: Total population 24 million Labor force 75% of the total population Unemployment Population 890,750 Use the information provided to answer the following questions: Calculate the population that was employed in Australia in 2020. Calculate Australia’s unemployment rate 2020.Why is it important that the rate at which we earn interest should be higher than the inflation rateWhat is the Inflation-free interest rate? Give an example?
