Initially, Ginny earns a salary of $300 per year and Eric earns a salary of $200 per year. Ginny lends Eric $100 for one year at an annual interest rate of 16% with the expectation that the rate of inflation will be 12% during the one-year life of the loan. At the end of the year, Eric makes good on the loan by paying Ginny $116. Consider how the loan repayment affects Ginny and Eric under the following scenarios. Scenario 1: Suppose all prices and salaries rise by 12% (as expected) over the course of the year. In the following table, find Ginny's and Eric's new salaries after the 12% increase, and then calculate the $116 payment as a percentage of their new salaries. (Hint: Remember that Ginny's salary is her income from work and that it does not include the loan payment from Eric.) Value of Ginny's new salary after one year The $116 payment as a percentage of Ginny's new salary Value of Eric's new salary after one year The $116 payment as a percentage of Eric's new salary Scenario 2: Consider an unanticipated decrease in the rate of inflation. The rise in prices and salaries turns out to be 2% over the course of the year rather than 12%. In the following table, find Ginny's and Eric's new salaries after the 2% increase, and then calculate the $116 payment as a percentage of their new salaries. percentage of Ginny's new salary Value of Eric's new salary after one year The $116 payment as a percentage of Eric's new salary Value of Ginny's The $116 payment as a new salary after one year An unanticipated decrease in the rate of inflation benefits (Eric or Ginny) and harms (Eric or Ginny).
Initially, Ginny earns a salary of $300 per year and Eric earns a salary of $200 per year. Ginny lends Eric $100 for one year at an annual interest rate of 16% with the expectation that the rate of inflation will be 12% during the one-year life of the loan. At the end of the year, Eric makes good on the loan by paying Ginny $116. Consider how the loan repayment affects Ginny and Eric under the following scenarios. Scenario 1: Suppose all prices and salaries rise by 12% (as expected) over the course of the year. In the following table, find Ginny's and Eric's new salaries after the 12% increase, and then calculate the $116 payment as a percentage of their new salaries. (Hint: Remember that Ginny's salary is her income from work and that it does not include the loan payment from Eric.) Value of Ginny's new salary after one year The $116 payment as a percentage of Ginny's new salary Value of Eric's new salary after one year The $116 payment as a percentage of Eric's new salary Scenario 2: Consider an unanticipated decrease in the rate of inflation. The rise in prices and salaries turns out to be 2% over the course of the year rather than 12%. In the following table, find Ginny's and Eric's new salaries after the 2% increase, and then calculate the $116 payment as a percentage of their new salaries. percentage of Ginny's new salary Value of Eric's new salary after one year The $116 payment as a percentage of Eric's new salary Value of Ginny's The $116 payment as a new salary after one year An unanticipated decrease in the rate of inflation benefits (Eric or Ginny) and harms (Eric or Ginny).
Chapter7: Unemployment And Inflation
Section: Chapter Questions
Problem 7E
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Transcribed Image Text:Initially, Ginny earns a salary of $300 per year and Eric earns a salary of $200 per year. Ginny
lends Eric $100 for one year at an annual interest rate of 16% with the expectation that the
rate of inflation will be 12% during the one-year life of the loan. At the end of the year, Eric
makes good on the loan by paying Ginny $116. Consider how the loan repayment affects
Ginny and Eric under the following scenarios.
Scenario 1: Suppose all prices and salaries rise by 12% (as expected) over the course of the
year. In the following table, find Ginny's and Eric's new salaries after the 12% increase, and
then calculate the $116 payment as a percentage of their new salaries. (Hint: Remember that
Ginny's salary is her income from work and that it does not include the loan payment from
Eric.)
Value of Ginny's new
salary after one year
The $116 payment as a
percentage of Ginny's
new salary
Value of Eric's new
salary after one year
The $116 payment as a
percentage of Eric's
new salary
Scenario 2: Consider an unanticipated decrease in the rate of inflation. The rise in prices and
salaries turns out to be 2% over the course of the year rather than 12%. In the following table,
find Ginny's and Eric's new salaries after the 2% increase, and then calculate the $116
payment as a percentage of their new salaries.
percentage of Ginny's
new salary
Value of Eric's new
salary after one year
The $116 payment as a
percentage of Eric's new
salary
Value of Ginny's The $116 payment as a
new salary after
one year
An unanticipated decrease in the rate of inflation benefits (Eric or Ginny) and harms (Eric or
Ginny).
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