Hong Kong’s inflation rate rose to 7.9% last month – the sharpest jump in 16 years – confirming what many families already feared as they struggle to keep up with runaway cost of food and rent ……
(a) What is inflation? (2 marks)
(b) Many workers have their salaries increased during inflation. Explain whether the real income of these workers would necessarily rise. (3 marks)
To relieve the effect of inflation on citizens, the government has issued inflation-linked bonds (ibonds) with interest paid to bondholders every six months. The interest rate is positively related to the actual inflation rate of the last half-year period.
(c) What is the opportunity cost of holding cash instead of ibonds? (2 marks)
(d) Explain how ibonds would relieve the effect of inflation on their holders. (2 marks)