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Chapter 9: Q 19 (page 243)

Identify several parties likely to be helped and hurt

by inflation.

Short Answer

Expert verified

The inflation effect is on the whole economy because of its volatility.

Step by step solution

01

Step 1. Definition

Inflation is the rate at which prices increase over a period of time. Inflation is a broad measure, such as the increase in prices or the increase in the cost of living in a country.

02

Step 2. Explanation

Debtors, employers, borrowers, and the person whose income increases at a rate that is more than inflation are helped by inflation or they are on the positive side. This is because the debtors have to pay at a fixed interest while the prices are rising and employers get work done on the previous price.

While on the other side or on the negative side creditors, fixed income persons like pensioners and consumers are hurt by inflation. This is because creditors have to get an interest that is low as compared today and fixed income earners have on a negative side because goods become expensive.

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Most popular questions from this chapter

Imagine that the government statisticians who calculate the inflation rate have been updating the basic basket of goods once every 10 years, but now they decide to update it every five years. How will this change affect the amount of substitution bias and quality/new goods bias?

Who in an economy is the big winner from inflation?

The total price of purchasing a basket of goods in the United Kingdom over four years is year 1=拢940, year 2=拢970, year 3=拢1000, and year 4=拢1070. Calculate two price indices, one using year 1as the base year (set equal to 100) and the other using year 4as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.

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 11months.

How do economists use a basket of goods and

services to measure the price level?
See all solutions

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