Module 14: Inflation

Match inflation costs:

Destinee had to walk to three different ATMs to get the cash she needed when

visiting Venezuela last year

• shoe leather costs       

• menu costs     

• unit of account costs

Match inflation costs:

Parvin is nervous to buy a new phone for her upcoming trip because the price

changes every time she looks at them.

• shoe leather costs       

• menu costs     

• unit of account costs

Determine if the individual is helped or hurt by unexpected inflation. Explain the answer.

Jack retired five years ago and now lives on a fixed-income annuity and a small savings account that pays him 1% interest on the balance.  The current inflation rate is 1.7%.

Determine if the individual is helped or hurt by unexpected inflation. Explain the answer.

Jill has worked at her current position without a raise for 4 years.  Because inflation has risen 5% over the course of the 4 years, she has struggled to pay day-to-day living expenses and her house payment.  She asked her employer for a raise and he gave her a 6% raise because she is such a good worker.

Determine if the individual is helped or hurt by unexpected inflation. Explain the answer.

Wendy manages a bank in the local area.  The previous manager made several fixed-rate loans to customers at low interest rates to bring in new depositors.  Inflation is now rising at 3% per year.

Determine if the individual is helped or hurt by unexpected inflation. Explain each answer.

Leia just read that the national debt owed by the federal government is at an all-time high. (Explain any possible impact on the federal government by unexpected inflation.)

Nominal versus Real Interest rates

If the nominal interest rate is 8% and expected inflation is 3%, then what is the real interest rate?

• 8%

• 10%

• 5.5%

• 5%

Nominal versus Real Interest rates

If the nominal interest rate is 7% and the real interest rate is 3%, then what is the expected inflation?

• 7% – expected inflation = 3%, so expected inflation would be 4%.

• 4% - 3%, so expected inflation would be 1%.

• 7.1% – expected inflation = 3%, so expected inflation would be 4%.

Nominal versus Real Interest rates

If you get a fixed rate loan with a nominal interest rate of 6% with expected inflation of 3% and then actual inflation is 5%, who is hurt by this situation?

• The bank would be hurt because you are paying them back with dollars that purchase less than what they lent you.

• The consumer would be hurt because they have to pay back with dollars to the bank

Match the inflation costs:

Maria reads an article describing the store keepers in Zimbabwe raising prices 5

times a day during the hyperinflation in that county.

• shoe leather costs       

• menu costs     

• unit of account costs