Question

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 1: Suppose all prices and salaries rise by 5% (as expected) over the course of the year. In the following table, find Alyssa's and Tim's new salaries after the 5% increase, and then calculate the $110 payment as a percentage of their new salaries. (Hint: Remember that Alyssa's salary is her income from work and that it does not include the loan payment from Tim.)

Value of Alyssa's new salary after one year:

A. $400

B. $420

C. $440

D. $540

The $110 payment as a percentage of Alyssa's new salary:

A.26%

B.10%

C.330%

D.5%

Value of Tim's new salary after one year:

A. $200

B. $210

C. $220

D. $330

The $110 payment as a percentage of Tim's new salary:

A. 76%

B. 10%

C. 15%

D. 52%

Scenario 2: Consider an unanticipated increase in the rate of inflation. The rise in prices and salaries turns out to be 20% over the course of the year rather than 5%. In the following table, find Alyssa's and Tim's new salaries after the 20% increase, and then calculate the $110 payment as a percentage of their new salaries.

Value of Alyssa's new salary after one year:

A. $460

B. $480

C. $560

D. $400

The $110 payment as a percentage of Alyssa's new salary:

A. 10%

B. 42%

C. 23%

D. 20%

Value of Tim's new salary after one year:

A. $230

B. $240

C. $340

D. $200

The $110 payment as a percentage of Tim's new salary:

A. 20%

B. 46%

C. 25%

D. 83%

An unanticipated increase in the rate of inflation benefits (Alyssa/Tim) and harms (Alyssa/Tim).

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Answer #1

Answer :

Scenerio 1 :

Value of Alyssa's new salary after one year: =420

The $110 payment as a percentage of Alyssa's new salary: = 26 %

Value of Tim's new salary after one year: = $210

The $110 payment as a percentage of Tim's new salary:= 52 %

Scenario 2:

Value of Alyssa's new salary after one year: = $ 480

The $110 payment as a percentage of Alyssa's new salary: 23 %

Value of Tim's new salary after one year: = $240

The $110 payment as a percentage of Tim's new salary: = 46 %

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