general, are rising, and people have not adjusted Unanticinated inflation is def
ID: 1109194 • Letter: G
Question
general, are rising, and people have not adjusted Unanticinated inflation is defined as: a period when the dollar prices of all products in their contracts to reflect the expected effects of the rising dollar prices of all products Unanticieated deflation is defined es: a period when the dollar prices of all products in general, are falling and people have not adjusted their contracts of reflect the expected effects of the faling dollar prices of all products From the following list select potential gainers from agnanticpated inlatien and esplain why a. in a fixed money wage labor contract: b. in a fixed interest rate lending contract: c. if a progressive income tax law exists d. between holders of money and holders of real assets: holders of real assets becqmuse the dalla prices ot thase real assets are List potential losers from unanticipated delation and eplain why a. if a ixed money wage labor contract exists: (owners and managers lose and laborers will gain, explanation 7. paid with money that will buy a larger basket of products, because dollar prices are falling b. if a fixed interest rate lending contract exists: c. if a progressive income tax law exists d. between holders of money and holders of real assets: holders ofreal assets, because the dollar prices of those real assets are decreasing, while the purchasing power of each dollar of money held increases Anticipated inflation is defined as aperiod when the dolar prices of ell product, in general, and people have adjusted their contracts io reflect the expected effects of rising dollar prices 8. Fill in the following, if the inflation rate or deflation rate is anticipated, then: % change in money wage-% change in real wages + b. money interest rate- real interest rate +Explanation / Answer
Answer to question 6
Unanticipated inflation will cause a sudden hike in prices where people have not yet adjusted their financial agreements.
In case of a. Fixed money wage labour contract
A fixed money wage contact is one where the employee signs or agrees to get a fixed income for the work done. This agreement is actually beneficial to both generally as the employer would know his commitment and the employee will have a stable flow of income. However in case of Unanticipated inflation, the employer will Pygocentrus get same wages despite the value of money falling rapidly. This means in real terms the employer will pay lesser amount as the money is worth less now. For example if he paid 1000 as wages when inflation rate was 10%. And say, the inflation rate is now 20% this means money is worth lesser by the inflation rate. Hence the employer will enjoy this difference between the real wage and the nominal wage. He is the gainer.
B. Fixed rate lending contract.
In such a contract, the parties agree to a fixed interest rate. Which means, if A lends 1000 for 10% rate of interest, then the borrower pays 100 as interest. Here the borrower will stand to gain as he would pay the same interest even though the value of money has gone down. Hence borrower is the gainer here.
C. Progressive tax system is where higher income individuals are taxed higher than the lower income individuals. This will be beneficial for the state as tax payers will end up in a higher slab. But the real benefit would be the difference between the tax rate and inflation rate.
D. This has been given with the explanation.
Solution to question 7
In Unanticipated deflation, the price level drops and the people would not have amended their arrangements. Let's see each case below.
A. This has been given with the explanation
B. In a fixed interest rate lending contract, the lender will receive a fixed interest from the borrower. At times of deflation, the prices fall making the value of money go up. This means in real terms he is receiving more. Hence the borrowers will be the potential losers here.
C. If a progreasiness tax rate exists, tax payers will be benefited as they will all fall in a lower tax range making the government lose the tax money. So the government is the potential loser.
D. The answer is already given.
Solution to 8.
Here the inflation is anticipated. So all contracts and income will be adjusted to the new level.
A. % change in money wages= % change in real wage + inflation rate
As inflation rate is anticipated, the money wage will be adjusted perfectly to capture the inflation rate.
B. Money interest rate= real interest rate + inflation rate.
The nominal or money interest rate will also be fully adjusted to capture the inflation rate. So there will be no losers or gainers here like Unanticipated inflation or deflation.
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