Question

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 11 months

Answer 1

a. A union member with a COLA wage contract

He will be unaffected by the inflation because his wages will be adjusted under the COLA wage contract

b. Someone with a large stash of cash in a safe deposit box

He will be hurt by the inflation because the worth of his cash is reduced so the purchasing power of cash decreases.

c. A bank lending money at a fixed rate of interest

It will be hurt because inflation hurts the lenders as real interest rate decreases.

d. A person who is not due to receive a pay raise for another 11 months

He will be hurt by the inflation because his nominal wage will not increase and inflation will reduce the worth of wages.