CE 09-05

Refer to the following information on economy A.

(a) What is inflation? (2 marks)

(b) Suppose people did not expect any change in the price level in years 2006 to 2008. In 2006. Phelps borrowed a housing mortgage loan from a bank at a fixed interest rate. Explain whether Phelps would gain or lose when the changes indicated in the above table occurred. (3 marks)