(Use this statement for pictures) Initially, Megan earns a salary of $300 per year and Larry earns a salary of $200 per year. Megan lends Larry $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, Larry makes good on the loan by paying Megan $116. Consider how the loan repayment affects Megan and Larry under the following scenarios.correct the answers i picked out... ### Inflation and Its Effects on Salaries#### Scenario 1:Suppose all prices and salaries rise by 12% (as expected) over the course of the year. In the following table, find Megan's and Larry's new salaries after the 12% increase, and then calculate the $116 payment as a percentage of their new salaries. *Hint: Remember that Megan's salary is her income from work and that it does not include the loan payment from Larry.*| Value of Megan's new salary after one year | The $116 payment as a percentage of Megan's new salary | Value of Larry's new salary after one year | The $116 payment as a percentage of Larry’s new salary || --- | --- | --- | --- || $448 | 35% | $342 | 28% |#### 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 Megan's and Larry's new salaries after the 2% increase, and then calculate the $116 payment as a percentage of their new salaries.| Value of Megan's new salary after one year | The $116 payment as a percentage of Megan's new salary | Value of Larry's new salary after one year | The $116 payment as a percentage of Larry’s new salary || --- | --- | --- | --- || $384 | 38% | $366 | 14% |#### Conclusion:An unanticipated decrease in the rate of inflation benefits Larry and harms Megan.

Scenario 1: Megan new salary: Megan new salary can be calculated as follows:New salary = Initial…

Answered: Initially, Megan earns a salary of $300…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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(Use this statement for pictures)

Initially, Megan earns a salary of $300 per year and Larry earns a salary of $200 per year. Megan lends Larry $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, Larry makes good on the loan by paying Megan $116. Consider how the loan repayment affects Megan and Larry under the following scenarios.

correct the answers i picked out...

### Inflation and Its Effects on Salaries

#### Scenario 1:
Suppose all prices and salaries rise by 12% (as expected) over the course of the year. In the following table, find Megan's and Larry's new salaries after the 12% increase, and then calculate the $116 payment as a percentage of their new salaries.
*Hint: Remember that Megan's salary is her income from work and that it does not include the loan payment from Larry.*

| Value of Megan's new salary after one year | The $116 payment as a percentage of Megan's new salary | Value of Larry's new salary after one year | The $116 payment as a percentage of Larry’s new salary |
| --- | --- | --- | --- |
| $448 | 35% | $342 | 28% |

#### 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 Megan's and Larry's new salaries after the 2% increase, and then calculate the $116 payment as a percentage of their new salaries.

| Value of Megan's new salary after one year | The $116 payment as a percentage of Megan's new salary | Value of Larry's new salary after one year | The $116 payment as a percentage of Larry’s new salary |
| --- | --- | --- | --- |
| $384 | 38% | $366 | 14% |

#### Conclusion:
An unanticipated decrease in the rate of inflation benefits Larry and harms Megan.

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