Question 1

Assume you borrow $1,000 on credit cards at an annual interest rate of 10 percent. If the inflation rate is 12 percent during the year and the debt has to be paid back in 12 months, then:

Accepted Answer

The inflation rate of 12 percent means that prices are increasing, which reduces the purchasing power of each dollar. Therefore, when the borrower repays the $1,000 debt after 12 months, those dollars will have less purchasing power than when they were borrowed. This means that the borrower will effectively be paying back less than $1,000 in real terms, but still owe the original amount plus interest, leading to a redistribution of income towards the bank. The real return for the bank will not be greater than initially expected, as the interest rate of 10 percent was set to account for inflation in the first place.

Question 2

During a period of economic expansion, we would expect increasing levels of employment.

Accepted Answer

During a period of economic expansion, businesses are growing and demand for goods and services increases. This typically leads to an increase in employment as businesses need to hire more workers to meet the growing demand.

Question 3

Assume that for a given year, the nominal interest rate is 9 percent while inflation rises to 11 percent indicating a 4 percent higher rate than anticipated. Which group of people is made better off by the inflation?

Accepted Answer

Those who borrow at fixed interest rates are made better off by inflation because the real value of their debt decreases as the purchasing power of money declines with inflation. They can repay the loan borrowed at a lower real value with the same nominal value.

Question 4

When there is an upward rise in the volume of economic activity, the economy is said to be in a recession.

Accepted Answer

When there is an upward rise in the volume of economic activity, it is actually a sign of economic growth, not a recession. A recession refers to a period of economic decline characterized by reduced economic activity, high unemployment rates, and other negative economic indicators.

Question 5

If the nominal interest rate is 6.3 percent and the inflation rate is 7.2 percent, then the real interest rate equals:

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. Therefore, the real interest rate in this case would be -0.9% (6.3% - 7.2% = -0.9%).

Question 6

The figure given below represents the demand and supply conditions of an economy.?Figure 7.3
 
-Refer to Figure 7.3. Which of the following explains the shift in the supply curve from S₁ to S₂?

Accepted Answer

Decreases in oil supplies as experienced in the 1970s would reduce the supply of oil, shifting the supply curve to the left.

Question 7

Which of the following could contribute to cost-push inflation?

Accepted Answer

Higher wage demands by trade unions can lead to an increase in production costs for firms, which may then be passed on to consumers in the form of higher prices, contributing to cost-push inflation.

Question 8

Which of the following is true of hyperinflation?

Accepted Answer

Hyperinflation is a situation in which the inflation rate is extremely high leading to a rapid and significant decrease in the value of a currency. As a result, people become reluctant to hold that currency, leading to a further decrease in its value. This creates a vicious cycle leading to further hyperinflation.

Question 9

In a business cycle, a peak marks the end of an expansion and the beginning of a recession.

Accepted Answer

A peak is the highest point of economic growth in a business cycle, after which the economy starts to decline into a recession. Therefore, a peak marks the end of an expansion and the beginning of a recession.

Question 10

Demand-pull inflation is caused:

Accepted Answer

Demand-pull inflation occurs when there is excessive spending in an economy that is already producing goods and services at its maximum capacity. This typically leads to an increase in the prices of goods and services as demand outstrips supply. Options A, B, and C are incorrect as they do not directly explain demand-pull inflation. Option E is incorrect as it describes a situation where there is no inflation.

Question 11

Which of the following countries did not experience hyperinflation in the past 20 years?

Accepted Answer

South Korea did not experience hyperinflation in the past 20 years. Nicaragua experienced hyperinflation in 2018, Ukraine experienced it in 2014, Bolivia experienced it in 1985 and 1986, and Argentina experienced it in 2001.

Question 12

When the real interest rate is less than zero, then:

Accepted Answer

When the real interest rate is less than zero, creditors will lose purchasing power. This is because inflation erodes the value of money, so the money that they are repaid will have less purchasing power than the money that they loaned out. For example, if the nominal interest rate is 2% and inflation is 3%, the real interest rate would be -1%, which means that the creditor is effectively losing 1% of their purchasing power.

Question 13

The Great Depression was the most severe recession experienced by the U.S. economy, during which national output had declined by 25 percent.

Accepted Answer

This statement is true. The Great Depression, which started in 1929 and lasted until the late 1930s, was the most severe economic downturn in the history of the United States. During this period, national output (measured by Gross Domestic Product) declined by approximately 25 percent.

Question 14

The NBER focuses primarily on the value of real GDP while deciding whether an economic contraction is a recession, because it is measured monthly and allows the identification of the month in which business-cycle turning points occur.

Accepted Answer

The NBER does not primarily focus on real GDP because it is measured quarterly, not monthly. Instead, it considers a variety of monthly indicators to identify the peaks and troughs of business cycles.

Question 15

Other things equal, the equation for the real interest rate indicates that:

Accepted Answer

The equation for the real interest rate is Nominal Interest Rate - Inflation Rate = Real Interest Rate. Therefore, as inflation decreases, the real interest rate will rise.

Question 16

Which of the following led to an introduction of a new currency in Argentina in the mid 1980s?

Accepted Answer

The introduction of a new currency in Argentina in the mid 1980s was due to hyperinflation. The inflation had become so high that the existing currency had lost its value, leading to the need for a new currency.

Question 17

If increases in total spending are not offset by increases in the supply of goods and services, the average price level will rise. Which of the following factors is responsible for this rise?

Accepted Answer

Demand-pull inflation occurs when there is an increase in total spending that is not met with an increase in the supply of goods and services, causing the average price level to rise. Cost-push inflation occurs when businesses face higher production costs, leading to higher prices. Fiscal deficits refer to the government spending more than it collects in revenue, which can result in inflation if it leads to increased borrowing and spending. Wage-push inflation occurs when workers demand higher wages, leading businesses to increase prices to cover the increased costs. Unemployment does not directly cause inflation but can impact it indirectly through its effects on total spending and supply of goods and services.

Question 18

Which of the following is most likely to result if the Congress passes the living wage law?

Accepted Answer

If the living wage law is passed, it would increase the wages of workers, leading to higher labor costs for businesses. To offset these increased costs, businesses may raise prices on their goods/services. This cost-push inflation would likely result in an overall increase in prices for consumers.

Question 19

Mortgages with variable interest rates:

Accepted Answer

Mortgages with variable interest rates are offered at interest rates that can be adjusted to changes in inflation over time. This means that when inflation increases, the interest rate also increases, which helps lenders to maintain their purchasing power. As a result, borrowers are less likely to default on their loans, making them less risky for lenders.

Question 20

The four phases of a business cycle, in order, are trough, depression, peak, and expansion.

Accepted Answer

The four phases of a business cycle, in order, are trough, expansion, peak, and recession. The term "depression" is not typically used to describe a phase of the business cycle.

Quiz 7: Unemployment and Inflation