6. Unanticlpated changes in the rate of inflation Initially, Ginny earns a salary of $600 per...

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6. Unanticlpated changes in the rate of inflation Initially, Ginny earns a salary of $600 per year and Eric earns a salary of

business economics

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Answer 1

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SCENARIO - 1

(i) Value of Ginny’s new salary after 1 year ($) = 600 x 1.1 = 660

(ii) $224 payment as % of Ginny's new salary = $224/$660 = 0.34 = 34%

(iii) Value of Eric's new salary after 1 year ($) = 400 x 1.1 = 440

(iv) $224 payment as % of Eric's new salary = $224/$440 = 0.51 = 51%

SCENARIO - 2

(i) Value of Ginny's new salary after 1 year ($) = 600 x 1.05 = 630

(ii) $224 payment as % of Ginny's new salary = $224/$630 = 0.36 = 36%

(iii) Value of Eric's new salary after 1 year ($) = 400 x 1.05 = 420

(iv) $224 payment as % of Eric's new salary = $224/$420 = 0.53 = 53%

(3) Unanticipated decrease in rate of inflation benefits Ginny and harms Eric.

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