Question

Suppose that in 2019 there is a sudden, unanticipated 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 2019 but whose monthly mortgage payments to a savings bank will remain fixed

b. An apartment landlord who has guaranteed to his tenants that their monthly rent payments during 2019 will be the same as they were during 2018

c. A banker who made an auto loan that the auto buyer will repay at a fixed rate of interest during 2019

d. A retired individual who earns a pension with fixed monthly payments from her past employer during 2019

Short answer

The situations faced by the following individuals are,

a. gains

b. loses

c. loses

d. loses

Step-by-step solution

part (a) introduction

The homeowner gains from the unanticipated burst of inflation as the homeowner's wages will keep pace with inflation. The monthly mortgage payments to a savings bank will remain fixed and hence his purchasing power will increase.

part (b) explanation

The apartment landlord loses from the unanticipated burst of inflation as the monthly rent payments will be the same as they were in$2018$. Hence his purchasing power will decrease.

part (c) explanation

The banker loses from the unanticipated burst of inflation as the interest rate is fixed by his buyer and hence his purchasing power decreases.

part (d) explanation

The retired individual who earns a pension with fixed monthly payments from her past employer loses from the unanticipated burst of inflation as the purchasing power decreases.