Question

7. Unanticipated changes in the rate of inflation Initially, Becky earns a salary of $600 per...

7. Unanticipated changes in the rate of inflation

Initially, Becky earns a salary of $600 per year and Alex earns a salary of $400 per year. Becky lends Alex $200 for one year at an annual interest rate of 12% with the expectation that the rate of inflation will be 10% during the one-year life of the loan. At the end of the year, Alex makes good on the loan by paying Becky $224. Consider how the loan repayment affects Becky and Alex under the following scenarios.

Scenario 1: Suppose all prices and salaries rise by 10% (as expected) over the course of the year. In the following table, find Becky's and Alex's new salaries after the 10% increase, and then calculate the $224 payment as a percentage of their new salaries. (Hint: Remember that Becky's salary is her income from work and that it does not include the loan payment from Alex.)

Value of Becky's new salary after one year

The $224 payment as a percentage of Becky's new salary

Value of Alex's new salary after one year

The $224 payment as a percentage of Alex's new salary

Scenario 2: Consider an unanticipated decrease in the rate of inflation. The rise in prices and salaries turns out to be 5% over the course of the year rather than 10%. In the following table, find Becky's and Alex's new salaries after the 5% increase, and then calculate the $224 payment as a percentage of their new salaries.

Value of Becky's new salary after one year

The $224 payment as a percentage of Becky's new salary

Value of Alex's new salary after one year

The $224 payment as a percentage of Alex's new salary

An unanticipated decrease in the rate of inflation benefitsalex or becky and harms alex or becky??????

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

SCENARIO - 1

a) Value of Becky's new salary after one year = 600 x 1.1 = 660

b) $224 payment as % of Becky's new salary = $224/$660 = 0.34 = 34%

c) Value of Alex's 's new salary after 1 year = 400 x 1.1 = 440

d) $224 payment as % of Alex's new salary = $224/$440 = 0.51 = 51%

SCENARIO - 2

a) Value of Becky's new salary after 1 year = 600 x 1.05 = 630

b) $224 payment as % of Becky's new salary = $224/$630 = 0.36 = 36%

c) Value of Alex's new salary after 1 year = 400 x 1.05 = 420

d) $224 payment as % of Alex's new salary = $224/$420 = 0.53 = 53%

An unanticipated decrease in the rate of inflation benefits becky and harms alex

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
7. Unanticipated changes in the rate of inflation Initially, Dina earns a salary of $400 per...
7. Unanticipated changes in the rate of inflation Initially, Dina earns a salary of $400 per year and Charles earns a salary of $200 per year. Dina lends Charles $100 for one year at an annual interest rate of 10% with the expectation that the rate of inflation will be 5% during the one-year life of the loan. At the end of the year, Charles makes good on the loan by paying Dina $110. Consider how the loan repayment affects...
Initially, Alyssa earns a salary of $400 per year and Tim earns a salary of $200...
Initially, Alyssa earns a salary of $400 per year and Tim earns a salary of $200 per year. Alyssa lends Tim $100 for one year at an annual interest rate of 10% with the expectation that the rate of inflation will be 5% during the one-year life of the loan. At the end of the year, Tim makes good on the loan by paying Alyssa $110. Consider how the loan repayment affects Alyssa and Tim under the following scenarios. Scenario...
5. Interest, inflation, and purchasing power Suppose Kyoko is an avid reader and buys only mystery...
5. Interest, inflation, and purchasing power Suppose Kyoko is an avid reader and buys only mystery novels. Kyoko deposits $3,000 in a bank account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a mystery novel is priced at $15.00. Initially, the purchasing power of Kyoko's $3,000 deposit is___________mystery novels. For each of the annual inflation rates given in the following table,...
A prospective MBA student earns $50,000 per year in her current job and expects that amount...
A prospective MBA student earns $50,000 per year in her current job and expects that amount to increase by 9% per year. She is considering leaving her job to attend business school for two years at a cost of $50,000 per year. She has been told that her starting salary after business school is likely to be $105,000 and that amount will increase by 10% per year. Consider a time horizon of 10 years, use a discount rate of 10%,...
1. Interest, inflation, and purchasing power Suppose Rosa is an avid reader and buys only comic...
1. Interest, inflation, and purchasing power Suppose Rosa is an avid reader and buys only comic books. Rosa deposits $3,000 in a bank account that pays an annual nominal interest rate of 10%. Assume this interest rate is fixed—that is, it won't change over time. At the time of her deposit, a comic book is priced at $15.00. Initially, the purchasing power of Rosa's $3,000 deposit is_________ comic books. For each of the annual inflation rates given in the following...
A prospective MBA student earns $60,000 per year in her current job and expects that amount...
A prospective MBA student earns $60,000 per year in her current job and expects that amount to increase by 9% per year. She is considering leaving her job to attend business school for two years at a cost of $50,000 per year. She has been told that her starting salary after business school is likely to be $85,000 and that amount will increase by 13% per year. Consider a time horizon of 10 years, use a discount rate of 15%,...
A prospective MBA student earns $55,000 per year in her current job and expects that amount...
A prospective MBA student earns $55,000 per year in her current job and expects that amount to increase by 14% per year. She is considering leaving her job to attend business school for two years at a cost of $50,000 per year. She has been told that her starting salary after business school is likely to be $110,000 and that amount will increase by 15% per year. Consider a time horizon of 10 years, use a discount rate of 12%,...
Chapter 30 Money Growth and Inflation 1. Over the past 70 years, prices in the U.S....
Chapter 30 Money Growth and Inflation 1. Over the past 70 years, prices in the U.S. have risen on average about a. 2 percent per year. b. 4 percent per year. c. 6 percent per year. d. 8 percent per year. 2. Over the past 70 years, the overall price level in the U.S. has experienced a(n) a. 4-fold increase. b. 8-fold increase. c. 12-fold increase. d. 16-fold increase. 4. Inflation can be measured by the a. change in the...
A prospective MBA student earns $45,000 per year in her current job and expects that amount...
A prospective MBA student earns $45,000 per year in her current job and expects that amount to increase by 6% per year. She is considering leaving her job to attend business school for two years at a cost of $30,000 per year. She has been told that her starting salary after business school is likely to be $90,000 and that amount will increase by 16% per year. Consider a time horizon of 10 years, use a discount rate of 9%,...
A prospective MBA student earns $45,000 per year in her current job and expects that amount...
A prospective MBA student earns $45,000 per year in her current job and expects that amount to increase by 8% per year. She is considering leaving her job to attend business school for two years at a cost of $30,000 per year. She has been told that her starting salary after business school is likely to be $95,000 and that amount will increase by 14% per year. Consider a time horizon of 10 years, use a discount rate of 14%,...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT