Answer Happy

6. Unanticipated changes in the rate of inflation Initially, Beth earrs a salary of $400 per year and Andrew earns a salary of $200 per year. Beth lends Andrew $100 for one year at an annual interest rate of 20% with the expectation that the rate of inflation will be 16% during the one-year life of the loan. At the end of the year, Andrew makes good on the loan by paying Beth $120. Consider how the loan repayment affects Beth and Andrew under the following scenarios. Scenario 1: Suppose all prices and salaries rise by 15% (as expected) over the course of the year. In the following table, find Beth's and Andrew's new salaries after the 16% increase, and then calculate the $120 payment as a percentage of their new salaries. (Hint: Remember that Beth's salary is her income from work and that it does not include the loan payment from Andrew.) Value of Beth's new salary after one year The $120 payment as a percentage of Beth's new salary Value of Andrew's new salary after one year The $120 payment as a percentage of Andrew's new salary Scenario 2: Consider an unanticipated decrease in the rate of inflation. The rise in prices and salaries turns out to be 5% over the course of the year rather than 16%. In the following table, find Beth's and Andrew's new salaries after the 5% increase, and then calculate the $120 payment as a percentage of their new salaries Value of Beth's new salary after one year The $120 payment as a percentage of Beth's new salary Value of Andrew's new salary after one year The $120 payment as a percentage of Andrew's new salary An uranticipated decrease in the rate of inflation benefits and harms