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Inflation

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Suppose that in 2009 there is a sudden, anticipated burst of inflation. Consider the situations faced by the following individuals. Who gains and who loses?

a. A homeowner whose wages will keep pace with inflation in 2009 but whose monthly mortgage interest payments to a savings bank will remain fixed

b. An apartment landlord who has guaranteed to his tenants that their monthly rent payments during 2009 will be the same as they were during 2008

c. A banker who made an auto loan that the auto buyer will repay at a fixed rate of interest during 2009

d. A retired individual who earns a pension with fixed monthly payments from her past employer during 2009

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Solution Preview

Simply put inflation is the expansion of the money supply. When the money supply inflates, the dollar gets devalued (simply because there are more of them). You should be able to understand the following situations from understanding this fact.

Suppose that in 2009 there is a sudden, anticipated burst of inflation. Consider the situations faced by the following individuals. Who gains and who loses?

In 2009, the money supply expanded. As a result, each existing dollar is worth less.

a. A homeowner whose wages will keep pace with inflation in 2009 but whose monthly mortgage interest payments to a savings bank will remain fixed.

A homeowner whose wages keep pace with inflation gets a raise. He ends up being paid more dollars. But his monthly ...

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Analyzing CPI data

Compute the inflation rate for each year 1989-2006 and determine which were years of inflation. In which years did deflation occur? In which years did disinflation occur? Was there hyperinflation in any year?

Year CPI
1988 118.3
1989 124
1990 130.7
1991 136.2
1992 140.3
1993 144.5
1994 148.2
1995 152.4
1996 156.9
1997 160.5
1998 163
1999 166.6
2000 172.2
2001 177.1
2002 179.9
2003 184
2004 188.9
2005 195.3
2006 201.8

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