Suppose that people expect inflation to equal 6 percent, but in fact, prices rise by 4 percent. Indicate whether this unexpectedly low inflation rate helps or hurts each of the following groups or individuals.

a. The government
b. A homeowner with a fixed-rate mortgage
c. A union worker in the second year of a labor contract
d. A college that has invested some of its endowment in government bonds that are not indexed Treasury bonds

Most governments owe debts and inflation is good for borrowers as opposed to lenders because it reduces the real value that they will have to pay back. With less inflation therefore, the government will be hurt because they will have to pay back more real debt.

b. Hurts the homeowner.

As already mentioned, lower inflation hurts borrowers and this case is no different. The homeowner will have to pay back more real dollars to the lending institution so they are definitely hurt.

c. Helps the Union worker.

Lower inflation means that goods and services are cheaper which is good for people like this union worker who are on contract and so will not see their salaries rise with inflation. They are helped because they can afford more goods and services on their salary.

d. Helps the college.

The government bonds that the college invested in are not indexed which means that they are not adjusted for inflation. With inflation not being as high as it was supposed to be therefore, these ones are helped because they get to receive more real return even though they do not have inflation adjusted securities to protect them.