Who Is Hurt and Who Is Helped by Unanticipated Inflation?
In Questions 1 through 15 decide which people or groups are hurt by unanticipated inflation and which benefit from unanticipated inflation. Circle the correct response, and explain why you answered as you did.
H means the person or group is hurt by unanticipated inflation.
G means the person or group gains from unanticipated inflation.
U means it is uncertain if the person or group is affected by unanticipated inflation or if the effects are unclear.
1. Banks extend many fixed-rate loans.
H G U
Explain:
2. A farmer buys machinery with a fixed-rate loan to be repaid over a 10-year period.
H G U
Explain:
3. Your family buys a new home with an adjustable-rate mortgage.
H G U
Explain:
4. Your savings from your summer job are in a savings account paying a fixed rate of interest.
H G U
Explain:
5. A widow lives entirely on income from fixed-rate corporate bonds.
H G U
Explain:
6. A retired couple lives entirely on income from a pension the woman receives from her former employer.
H G U
Explain:
7. A retired man lives entirely on income from Social Security.
H G U
Explain:
8. A retired bank official lives entirely on income from stock dividends.
H G U
Explain:
9. The federal government has a $5,000,000,000 debt.
H G U
Explain:
10. A firm signs a contract to provide maintenance services at a fixed rate for the next five years.
H G U
Explain:
11. A state government receives revenue mainly from a progressive income tax.
H G U
Explain:
12. A local government receives revenue mainly from fixed-rate license fees charged to businesses.
H G U
Explain:
13. Your friend rents an apartment with a three-year lease.
H G U
Explain:
14. A bank has loaned millions of dollars for home mortgages at a fixed rate of interest.
H G U
Explain:
15. Parents are putting savings for their child’s college education in a bank savings account.
H G U
Explain:
16. What conclusions can you draw about who is helped and who is hurt by unanticipated inflation?
17. If you were certain that the inflation rate would be 10 percent a year for the next 10 years, how might your behavior change? Does your answer depend on who you are? Student? Worker?