Question

20. If inflation rises unexpectedly by 8%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected: a. A department store that often has large amounts of cash on hand b. c. Are A person buying a home with an ARM A retired person living on a fixed pension A state government borrowing money at a fixed interest rate to build a highway d.

Answer 1

Answer:

20)

a) A departmental store that has large amount of cash in hand is hurt by high inflation . The cash is not yielding any interest as it has not been invested anywhere and is just being held as cash . Inflation increases the price of goods and services, effectively decreasing the amount of goods and services that can be purchased with cash. Thus the cash is worth less when inflation rises than earlier. Thus the real wealth of the cash holder declines when inflation rises.

b) When inflation rises, the Central bank will increase the Interest rates to tackle inflation . The ARM rates generally tend to rise as interest rates rise . So the interest that a prospective home owner has to pay now if he buys a home will be higher. So he is hurt by higher inflation

c) A retired person living on fixed pension will be hurt by an unexpected rise in inflation. He suffers from a decline in their real income as prices rise. He spends a high percentage of their income for the same basket of goods as prices rise.

d) A state department borrowing at a fixed rate of interest of interest is helped when inflation rises because the interest he pays is fixed irrespective of inflation. The interest rate that he pays now on his loan is lower than the real interest rate .

other question:

The correct answer is (B) causes an economy's production possibilities curve to shift outward over time.

Production possibilities curve shows the combination of goods that can be produced if resources are fully employed and used efficiently.

As in general production of all goods are positively related to capital and hence as capital increases Production of all the goods increases and if resources are used efficiently and fully, then Producing capacity will increase and hence as Production possibilities curve shows the combination of goods that can be produced if resources are fully employed and used efficiently, so Production possibility curve will shift outward(or to the right).

Hence, the correct answer is (B) causes an economy's production possibilities curve to shift outward over time.