If the Inflation Rate Unexpectedly Rises from 1% to 6%,would

question 171

Essay

If the inflation rate unexpectedly rises from 1% to 6%,would each of the following gain or lose as a result?
a)Lars,who borrowed $50,000 last year repayable over the next 5 years at 6 percent interest.
b)Jan,who lent Lars the $50,000.
c)Arash,an elderly man living on a fixed company pension.
d)Ingrid,who receives a fixed 10 percent interest on her savings every year.
e)Svend,the owner of an electronics firm who signed an agreement with his employees paying annual wage increases of 5 percent.

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Definitions:

Variable Cost

Costs that change in proportion to the level of production or sales activity, such as raw materials and direct labor costs.

Fixed Costs

Fixed overheads that stay the same no matter how much is produced or sold, including rental fees or staff salaries.

Margin of Safety

The difference between actual or projected sales and the break-even point, indicating the amount by which sales can drop before a business incurs a loss.

Break-even Point

The level of sales at which total revenues equal total costs, and the business makes no profit but also incurs no loss.