I/GCSE Economics Question Analysis Topic: Economics - Inflation
Read the following news extract.
[Hong Kong's inflation rate rose to 7.9% last month - the sharpest jump in 16 years - confirming what many families already feared as they struggle to keep up with the runaway cost of food and rent ......]
(a) What is inflation?
(b) Many workers have their salaries increasing during inflation. Explain whether the real income of these workers would necessarily rise.
To relieve the effect of inflation on citizens, the government has issued inflation-linked bonds (ibonds) with interest paid to bondholders every six months. The interest rate is positively related to the actual inflation rate of the last half-year period.
(c) What is the opportunity cost of holding cash instead of ibonds?
(d) Explain how ibonds would relieve the effect of inflation on their holders.
Keywords for the following questions:
(a) Inflation is the persistent increase in the general price level.
(b) No, as real income falls if the % increase in price level is greater than nominal wage's % increase.
(c) The nominal return of the ibonds.
(d) Purchasing power of the invested sum of money would be preserved since ibonds' interest return would rise at the same rate as the actual inflation.
End of analysis. Great!