Question 1

You borrow money to buy a house in 2007 at a fixed interest rate of 6.5 percent. By 2010, the inflation rate has steadily fallen to 2.5 percent from the recent high of 4.0 percent in 2007. Considering only your mortgage, is inflation good news or bad news for you?

Accepted Answer

When inflation decreases, the real value of fixed mortgage payments increases, meaning you pay more in real terms.

Question 2

What matters to people is the face value of money or income.

Accepted Answer

What truly matters to people is the purchasing power of their money or income, which determines how much they can buy with it, rather than just the face value.

Question 3

If product prices decrease more than nominal wages decrease, the real value of wages will increase.

Accepted Answer

When product prices decrease more than nominal wages decrease, it means that the cost of living has decreased. This results in an increase in the purchasing power of wages, which is a measure of the real value of wages. Therefore, the real value of wages increases.

Question 4

The government uses the buying power of wages rather than face value or nominal value in reporting changes in ʺreal wagesʺ in the economy.

Accepted Answer

The government adjusts nominal wages for inflation to report changes in real wages, which takes into account the purchasing power of the wages. This is a more accurate measure of changes in wage earnings over time.

Question 5

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 the money is the real interest rate that would have been earned on the money if it had been invested in a risk-free asset, such as a government bond.

Question 6

Recall the Application about the impact inflation has on your potential future salary and the repayment of
student loans to answer the following question(s).
-According to this Application, more time would be required to pay off a student loan if all prices

Accepted Answer

The answer of Recall the Application about the impact inflation...

Question 7

Recall the Application about the impact inflation has on your potential future salary and the repayment of
student loans to answer the following question(s).
-In considering the costs involved for student loans that must be repaid in ten years, this Application is addressing the economic concept of

Accepted Answer

The economic concept addressed in the application is the real-nominal principle, which states that the real value of money changes over time due to inflation. Inflation reduces the value of money, which means that if a borrower's income and loan payments are not adjusted for inflation, the borrower will effectively end up paying more than they initially borrowed. This principle is relevant to the costs involved in repaying student loans over a ten-year period. Therefore, the best choice is D, the real-nominal principle.

Question 8

Recall the Application about the value of the minimum wage between 1974 and 2007 and the impact
inflation has on the real minimum wage to answer the following question(s). The following table is from
the Application.$\begin{array}{|l|l|l|}
\hline&1974&2007\
\hline\text { Minimum wage per hour } & \$ 2.00 & \$ 5.85 \
\hline \text { Weekly income from minimum wage } & \$ 80.00 & \$ 234.00 \
\hline \text { Cost of a standard basket of goods } & \$ 47.00 & \$ 202.00 \
\hline \text { Number of baskets per week } & 1.70 & 1.16\
\hline
\end{array}$

-In comparing the minimum wages between 1974 and 2007, this Application addresses the economic concept of

Accepted Answer

The Application addresses the real-nominal principle, which distinguishes between nominal values (like the face value of wages) and real values (adjusted for inflation), showing how inflation affects the purchasing power of the minimum wage over time.

Question 9

What matters to people is the real value of money or income.

Accepted Answer

People care about the purchasing power of their money or income, which is the real value they can derive from it. Inflation and other economic factors can impact the real value of money, making it a significant concern for individuals and households.

Question 10

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

Accepted Answer

The interest earned is 5% of $100, which is $5. However, with a 5% inflation rate, the purchasing power of money decreases by 5%, effectively offsetting the interest earned. Thus, the real gain is approximately $0.

Question 11

Recall the Application about the value of the minimum wage between 1974 and 2007 and the impact
inflation has on the real minimum wage to answer the following question(s). The following table is from
the Application.$\begin{array}{|l|l|l|}
\hline&1974&2007\
\hline\text { Minimum wage per hour } & \$ 2.00 & \$ 5.85 \
\hline \text { Weekly income from minimum wage } & \$ 80.00 & \$ 234.00 \
\hline \text { Cost of a standard basket of goods } & \$ 47.00 & \$ 202.00 \
\hline \text { Number of baskets per week } & 1.70 & 1.16\
\hline
\end{array}$

-Refer to the table above. By what percentage did the federal minimum wage increase from 1974 to 2007?

Accepted Answer

The federal minimum wage increased from $2.00 in 1974 to $5.85 in 2007, an increase of $3.85. The percentage increase is calculated as (3.85/2.00) * 100 = 192.5%.

Question 12

Recall the Application about the impact inflation has on your potential future salary and the repayment of
student loans to answer the following question(s).
-According to this Application, if you earn a salary of $40,000 in the first year and all prices triple in the next 10 years, what will your nominal annual salary be in 10 years?

Accepted Answer

If all prices triple in the next 10 years, the rate of inflation is 200% (3 times the original price) over 10 years, or approximately 14.87% per year (using the Rule of 72). Therefore, your nominal salary would be $120,000 ($40,000 x 3) after 10 years.

Question 13

Suppose your bank pays you 4 percent interest per year on your savings account, so that $1,000 grows to $1,040 over a one-year period. If prices increase by 1 percent per year over that time, approximately how much do you gain by keeping $100 in the bank for a year?

Accepted Answer

The answer of Suppose your bank pays you 4 percent...

Question 14

The government uses the buying power of wages in reporting changes in ʺnominal wagesʺ in the economy.

Accepted Answer

Nominal wages refer to the actual amount of money paid to workers without adjusting for changes in the buying power due to inflation. Changes in "real wages" account for the buying power.

Question 15

Recall the Application about the value of the minimum wage between 1974 and 2007 and the impact
inflation has on the real minimum wage to answer the following question(s). The following table is from
the Application.$\begin{array}{|l|l|l|}
\hline&1974&2007\
\hline\text { Minimum wage per hour } & \$ 2.00 & \$ 5.85 \
\hline \text { Weekly income from minimum wage } & \$ 80.00 & \$ 234.00 \
\hline \text { Cost of a standard basket of goods } & \$ 47.00 & \$ 202.00 \
\hline \text { Number of baskets per week } & 1.70 & 1.16\
\hline
\end{array}$

-Refer to the table above. The nominal value of the minimum wage in 2007 was

Accepted Answer

The nominal value of the minimum wage in 2007 is directly given in the table as $5.85 per hour.

Question 16

Recall the Application about the value of the minimum wage between 1974 and 2007 and the impact
inflation has on the real minimum wage to answer the following question(s). The following table is from
the Application.$\begin{array}{|l|l|l|}
\hline&1974&2007\
\hline\text { Minimum wage per hour } & \$ 2.00 & \$ 5.85 \
\hline \text { Weekly income from minimum wage } & \$ 80.00 & \$ 234.00 \
\hline \text { Cost of a standard basket of goods } & \$ 47.00 & \$ 202.00 \
\hline \text { Number of baskets per week } & 1.70 & 1.16\
\hline
\end{array}$

-Refer to the table above. What happened to the real value of the minimum wage between 1974 and 2007?

Accepted Answer

The real value of the minimum wage decreased because the number of baskets that could be purchased with the weekly income from the minimum wage decreased from 1.70 in 1974 to 1.16 in 2007, indicating that inflation eroded the purchasing power of the minimum wage.

Question 17

When product prices increase slower than nominal wages increase, the real value of wages decreases.

Accepted Answer

If product prices increase slower than nominal wages increase, it means that purchasing power increases as workers can afford more goods with their wages. Therefore, the real value of wages would actually increase.

Question 18

What is the nominal value of money?

Accepted Answer

The nominal value of money refers to its face value or the value printed on the currency note or coin. It does not consider factors like what can be purchased with the money, discounts, or savings by shopping on specific days of the week.

Question 19

Recall the Application about the impact inflation has on your potential future salary and the repayment of
student loans to answer the following question(s).
-According to this Application, if you earn a salary of $80,000 in the first year and all prices decrease by half in the next 5 years, what will your nominal annual salary be in 5 years?

Accepted Answer

If all prices decrease by half in the next 5 years, the inflation rate would be -50% per year. Therefore, your nominal salary in 5 years would be $40,000. This can be calculated by multiplying your initial salary of $80,000 by (1-0.50)^5 or (0.5)^5. This is because inflation decreases the value of money over time, meaning that even though prices have decreased, your salary has also decreased in value.

Question 20

What is the real value of money?

Accepted Answer

The real value of money is the quantity of goods and services it can buy. The face value of money may not accurately reflect its purchasing power due to inflation or changes in the economy. Compounded earnings in banks are an additional benefit but do not determine the real value of money. The ability to shop at market prices is a result of the real purchasing power of money.

Quiz 2: The Key Principles of Economics