AP_Krugman_Textbook

Summary 155

Section 3 Summary

Inflation rate Average inflation

Country in 2000 rate, 2000–2007

Brazil 7.1% 7.3%

China 0.3 1.6

France 1.7 1.8

Indonesia 3.8 8.8

Japan −0.7 −0.3

Turkey 56.4 27.8

United States 3.4 2.8

Zimbabwe 55.7 904.1

Source:IMF.

19.The accompanying diagram shows mortgage interest rates
and inflation during 1990–2005 in the economy of Albernia.
When would home mortgages have been especially attractive
and why?

Year

Inflation rate,

interest rate

12%

10

8

6

4

2

1990 1993 1996 1999 2002 2005

Mortgage

interest rate

Inflation

rate

20.The accompanying table provides the inflation rate in the year

2000 and the average inflation rate over the period 2000–2007

for eight different countries.

a.Given the expected relationship between average inflation and

menu costs, rank the countries in descending order of menu

costs using average inflation over the period 2000–2007.

b.Rank the countries in order of inflation rates that most fa-

vored borrowers with seven-year loans that were taken out

in 2000. Assume that the expected inflation rate was the in-

flation rate in 2000.

c.Did borrowers who took out seven-year loans in Japan gain

or lose overall versus lenders? Explain.