Indicate How an Unanticipated 5 Percent Jump

When prices rise, people worry whether the rise in their income will keep pace with inflation, and the more quickly prices rise, the more people suffer from the stresses of inflation and its uncertainties. People will constantly feel they have been fooled and cheated. Expectations about inflation affect future cash flow and require return and cost of capital followed directly from the present value equation. (Emery, Finnerty, 1997)

A. A person whose major asset is a house with a 30-year mortgage at a fixed interest rate.

As the text stated, inflation is an increase in the general (average) price level of goods and services in the economy. It indicates that it is very outstandingly good opportunity for the person. He or she would be very happy if inflation unanticipated jump up 5 percent. Like inflation, the purchasing power of a house will be reduced. For example, the 100,000-dollar loan that the person borrowed for a house, the loan could not buy the same house at the same amount next year. It would be a 105,000-dollars loan. In the same way, the interest rate will be increased sooner or later in long

B. A family holding most of its wealth in long term fixed yield bonds.

On the other hand, if the inflation decreases, the owner of the apartment might have to paying more money on fixed rate debt.

In this case, the owner who has a heavy debt for his business could not be indicated how bad or good it is, because we have no information enough to just him in how the unanticipated inflation rising affects his or her income or payment. We have to know the amount of money that he has to pay, and the interest rate, and how and how much the owner pays the debt back.

In addition, he or she does not worry about going up of interest rate because the interest rate will be increased sooner or later. If a rapid increase in price threatens to cause a consumer-spending boom and higher consumer-price inflation, a central bank will raise interest rates. (Economist,2002)

F. A worker whose wages are determined by a three year union contact ratified three month ago.

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