Question

Indicate whether the following groups would probably be harmed if the inflation rate were to increase from 4% to 8%. Indicate with a (Y) for yes or a (N) for no.

1. Investors in long-term U.S. government bonds

2. Homeowners with largely fixed rate mortgages

3. Restaurant workers in Texas making the legal minimum wage

4. Software engineers

5. Retirees on a fixed income

Answer 1

1. Yes

Investors would be harmed because the return they will get would fall in real terms. With inflation real value of return would fall.

2. No

With inflation homeowners will pay the fixed rate of mortgage but the real value of their payment is lower now. They will rather benefit.

3. Yes

Minimum wage does not consider increase in inflation. This means their real wage falls.

4. No

Software engineers are less in supply. They can demand higher salary with increase in inflation. They remain indifferent.

5. Yes

Fixed income does not change with inflation. Real value of retirees' income falls.