Please help me with this. Thanks !! The accompanying table provides the inflatio
ID: 1192308 • Letter: P
Question
Please help me with this. Thanks !! The accompanying table provides the inflation rate in the year 2000 and the average inflation rate over the period 2001-2013 for seven different countries. Given the expected relationship between average Inflation and menu costs, rank the countries in descending order of menu costs using average inflation over the period 2001-2013. Rank the countries in order of inflation rates that most favored borrowers with ten-year loans that were taken out In 2000. Assume that the loans were agreed upon with the expectation that the inflation rate for 2001 to 2013 would be the same as the Inflation rate in 2000. Did borrowers who took out ten-year loans in Japan gain or lose overall versus lenders? Explain.Explanation / Answer
a.
Descending order means “big to small” arrangement. The country of higher average inflation would come first than the lower average inflation.
The required descending order is as below:
Country
Average inflation rate
T
18.79%
I
7.56%
B
6.72%
US
2.43%
C
2.34%
F
1.86%
J
-0.23%
b.
Ranking should be made on the basis of descending order of inflation rate. Inflation and interest rate are inversely correlated. It means higher the inflation lower the interest. The country of having higher inflation must have lower interest rate, which favors borrowers. Therefore, higher inflation should come first.
The required descending order is as below:
Country
Average inflation rate
T
55.03%
B
7.06%
I
3.77%
US
3.37%
F
1.83%
C
0.40%
J
-0.78
c.
Since the inflation rate is negative in the country J, the interest rate would be very high there. Borrowers will lose here because of higher interest payments and lenders will gain here because of receiving higher interest.
Country
Average inflation rate
T
18.79%
I
7.56%
B
6.72%
US
2.43%
C
2.34%
F
1.86%
J
-0.23%
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