Question

If inflation is anticipated to be 5 percent per year and actual inflation for that year turns out to be 7​ percent, identify whether each of the following groups would be helped or hurt by​ this, or if the effort is indeterminate.

​
a. People who are living on fixed incomes.
​b. Banks that have made​ long-term fixed rate loans.
​c. People who have purchased bonds.
​d. A person who has purchased real estate with a bank loan.
​e. A recent college graduate with many loans to pay back.
​f. People who have purchased stock.
​g. Governments that have sold bonds.
​h. Savers with open passbook accounts.
​i. People who have purchased precious metals.
​j. Wage earners who are members of a strong union.

Answer 1

Inflation can cause redistributions of purchasing power. It can hurt people who hold considerable cash or have financial assets invested in options with nominal returns that do not keep up with inflation.

Step-by-step explanation:

Inflation can cause redistributions of purchasing power that hurt some and help others. People who are hurt by inflation include those who are holding considerable cash, whether it is in a safe deposit box or in a cardboard box under the bed. When inflation happens, the buying power of cash diminishes.

However, cash is only an example of a more general problem: anyone who has financial assets invested in a way that the nominal return does not keep up with inflation will tend to be affected by inflation. For example, if a person has money in a bank account that pays 4% interest, but inflation rises to 5%, then the real rate of return for the money invested in that bank account is negative 1%.