Which of the following people would we expect to be hurt by an increase in the rate of inflation from 3 percen

Question: Which of the following people would we expect to be hurt by an increase in the rate of inflation from 3 percent to 6 percent? a).A homeowner with a $50,000 fixed-rate mortgage on his home. b).A retired person who receives a monthly pension of $500 from her former employer. c).An automobile worker with a cost-of-living provision in his employment contract. d).A wealthy individual who owns corporate bonds that pay her an interest rate of 8 percent per year.

Public Comments

1. c
2. The correct answer is B. A is wrong because the mortgage is fixed rate, so the monthly payments are unaffected by a rise in inflation. C is wrong because the cost of living provision was specifically designed for situations where inflation (and, as logically follows, prices) increase. D is not the most correct answer. This person's real rate of return will decline as a result of the increase in inflation. But, the key word here is wealthy individual, which is what leads us to choose B, because the person is on a fixed income (the monthly pension payment). Since the inflation rate rises from 3 to 6 percent, the person on the fixed income has seen their real purchasing power decrease.