Question 1

Suppose prices increase by 4% per year.What nominal percentage return on your savings account would you require to get a 1% real return?

Accepted Answer

To get a real return of 1%, we need to add the inflation rate of 4% to it, making the required nominal percentage return 5%.

Question 2

Producing more output in an existing production facility by increasing the number of workers sharing the facility will bring into effect the principle of ________.

Accepted Answer

The answer of Producing more output in an existing production...

Question 3

Suppose your bank pays you 6% interest per year on your savings account.If prices increase by 3% per year over that time,approximately how much nominal value do you gain by keeping $100 in the bank for a year?

Accepted Answer

The nominal interest earned on $100 at a 6% interest rate is $6.

Question 4

The real value of money:

Accepted Answer

The real value of money refers to its purchasing power, or how much goods and services a sum of money can buy, rather than its face value or nominal value.

Question 5

You borrow money to buy a house in 2006 at a variable interest rate of 6.5%.Your interest rate is always 2% more than the rate of inflation.By 2009,the inflation rate has risen to 8.5%.Considering only your mortgage,is inflation good news or bad news for you?

Accepted Answer

The answer of You borrow money to buy a house...

Question 6

You borrow money to buy a house in 2006 at a fixed interest rate of 6.5%.By 2009,the inflation rate has risen to 8.5%.Considering only your mortgage,is inflation good news or bad news for you?

Accepted Answer

Inflation reduces the real value of fixed payments, so your mortgage payments become cheaper in real terms.

Question 7

You are running a small yard maintenance business for the summer.What do you expect to happen to the number of yards you can maintain in a day as you add workers if you don't purchase more capital equipment (like mowers and leaf blowers)?

Accepted Answer

The answer of You are running a small yard maintenance...

Question 8

The principle that what matters to people is the real value or purchasing power of money is the:

Accepted Answer

The real-nominal principle states that what matters to people is not the nominal value of money, but its real value or purchasing power. This means that people are concerned with how much they can actually buy with their money, rather than just the number of dollars they have. The other answer choices are unrelated or incorrect.

Question 9

Suppose your bank pays you 6% interest per year on your savings account,so that $100 grows to $106 over a one-year period.If prices increase by 3% per year over that time,approximately how much real value do you gain by keeping $100 in the bank for a year?

Accepted Answer

Real value gain is calculated by subtracting the inflation rate from the interest rate. In this case, the interest rate is 6% and the inflation rate is 3%, so the real value gain is 3%. Therefore, $100 in the bank at the end of the year is equivalent to $103 in today's dollars, giving a real value gain of $3. Option C is the closest to this answer.

Question 10

The real-nominal principle states that:

Accepted Answer

The real-nominal principle states that what matters to people is the purchasing power of money or income, rather than just the face value. This means that people are more likely to consider the impact of inflation on their income or the cost of goods they purchase, rather than just looking at the dollar amount.

Question 11

Suppose that you lend $1,000 to a friend and he or she pays you back one year later.What is the opportunity cost of lending the money?

Accepted Answer

The opportunity cost of lending money is the interest that could have been earned on the money if it were invested elsewhere. Thus, the best choice is B, which is the real interest rate that would have been earned on the money. Option C is not the best choice as it refers to nominal interest rate which does not take into account inflation. Option A is not right as there is an opportunity cost involved in lending money. Option D is also incorrect as there is no mention of the implicit cost of the money.

Question 12

A major league baseball player signs a contract that pays $50 million over five years.The $50 million is its ________ value.

Accepted Answer

The term "nominal" refers to the face value or stated value of something, without adjusting for inflation or other factors. In this case, the $50 million represents the nominal value of the baseball player's contract.

Question 13

If real salaries increase but nominal salaries do not,this means that:

Accepted Answer

When real salaries increase but nominal salaries do not, it means that the purchasing power of the salary has increased, which typically happens when prices fall, making goods and services cheaper relative to the salary.

Question 14

Suppose your bank pays you 5% interest per year on your savings account while prices increase by 3% per year over that time.Approximately how much nominal value do you gain by keeping $100 in the bank for a year?

Accepted Answer

The nominal value gain is the interest earned on the savings account, which is 5% of $100, equating to $5.

Question 15

If real salaries decrease but nominal salaries do not,this means that:

Accepted Answer

If nominal salaries do not decrease but real salaries do, it means that the cost of goods and services has increased, resulting in a decrease in the purchasing power of money. This phenomenon is known as inflation. Therefore, prices have risen.

Question 16

Suppose your bank pays you 5% interest per year on your savings account.If prices increase by 3% per year over that time,approximately how much real value do you gain by keeping $100 in the bank for a year?

Accepted Answer

Inflation decreases the value of money over time, while interest can help to offset this decrease. To determine the real value gained by keeping $100 in the bank for a year, we need to subtract the inflation rate from the interest rate:

Real interest rate = nominal interest rate - inflation rate
Real interest rate = 5% - 3%
Real interest rate = 2%

This means that the purchasing power of the $100 in the savings account has increased by 2% over a year. Therefore, the real value gained is $100 x 2% = $2.

Option A is incorrect because the interest earned is greater than the rate of inflation. Option C and D are incorrect because the real interest rate is only 2%, not 3% or 6%.

Question 17

When a firm hired its tenth worker,its factory output increased by four units per month.Would you expect the firm's output to increase by eight more units per month if the firm hired two more workers?

Accepted Answer

The answer of When a firm hired its tenth worker,its...

Question 18

Suppose prices increase by 3% per year.What nominal percentage return on your savings account would you require to get a 3% real return?

Accepted Answer

To get a real return of 3%, we need to earn a nominal return equal to the sum of the inflation rate and the real return. In this case, that's 3% + 3% = 6%. Therefore, we would require a nominal percentage return of 6% to get a 3% real return.

Question 19

The face value of money or income is called its ________ value.

Accepted Answer

Nominal value refers to the value of money or income in terms of the currency being used, without considering inflation or other economic factors. Real value takes into account inflation or other economic factors, while marginal value refers to the additional value gained from each additional unit of a commodity or service. External value is not a commonly used term in economics.

Question 20

The value of money or income in terms of the quantity of goods the money can buy is called its:

Accepted Answer

Real value takes into account the inflation or the changes in the purchasing power of money over time. It reflects the actual purchasing power of money rather than just its face value. Marginal value is the addition(al) utility or satisfaction gained from consuming an extra unit of a good or service, while nominal value is the face value or the value of money that is printed on a currency note or coin. Implicit value refers to the value that is not directly observable or evident but exists as a result of other factors.

Quiz 2: The Key Principles of Economics