Question 1

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

Accepted Answer

The $50 million is the nominal value, meaning it is the face value or stated value of the contract without adjusting for inflation or other factors.

Question 2

Suppose that you lend $1,000 to a friend and 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, as this represents the value of the next best alternative foregone by choosing to lend the money instead of using it for another purpose. The nominal interest rate does not take inflation into account, so it is not as accurate as the real interest rate for determining opportunity cost, while there is always an implicit cost associated with lending money, but it is not specific enough to be the best choice here.

Question 3

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 respond to changes in the real value of their income, such as inflation or changes in prices, rather than just the nominal value.

Question 4

You borrow money to buy a house in 2012 at a fixed interest rate of 6.5%.By 2016,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 money over time, so if you have a fixed interest rate, the real value of your mortgage payments decreases as inflation rises. This means you're effectively paying back less in today's dollars than when you borrowed the money.

Question 5

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 interest earned on $100 at a rate of 5% per year is $5, regardless of inflation.

Question 6

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 7

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

Accepted Answer

Real value refers to the purchasing power of a currency, while nominal value refers to the face value of the currency. Therefore, the value of money in terms of the goods it can buy is its real value. Marginal value refers to the additional benefit gained by consuming one more unit of a good or service, and implicit value refers to the non-monetary value placed on something, such as emotional satisfaction.

Question 8

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

The real value gained is calculated by subtracting the inflation rate from the interest rate. Here, 5% interest - 3% inflation = 2% real gain. On $100, a 2% gain is $2.

Question 9

You borrow money to buy a house in 2012 at a variable interest rate of 6.5%.Your interest rate is always 2% more than the rate of inflation.By 2016,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 10

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 11

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

Accepted Answer

The principle that what matters to people is the real value or purchasing power of money is referred to as the real-nominal principle. It implies that people are more concerned about the actual goods and services that can be purchased with a certain amount of money rather than the nominal value of money itself.

Question 12

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 that is equal to the inflation rate plus the real return. In this case, inflation is 3%, so to earn a real return of 3%, we need a nominal return of 6%. Therefore, the correct choice is C, which is 6%.

Question 13

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 14

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

The nominal gain is $6, but with a 3% inflation rate, the real gain is $6 - $3 = $3.

Question 15

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 16

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

Nominal value is the value of something in current dollars without adjusting for inflation. In this case, if you keep $100 in the bank for a year at a 6% interest rate, you gain $6 in interest. However, if prices increase by 3%, the purchasing power of that $106 at the end of the year is the same as the purchasing power of $103 at the beginning of the year. Therefore, the nominal value gained by keeping $100 in the bank for a year is $6.

Question 17

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

Accepted Answer

Nominal salaries refer to the actual amount of money paid, whereas real salaries take into account inflation and purchasing power. If real salaries decrease but nominal salaries do not, this means that prices have risen, resulting in a decrease in the purchasing power of money.

Question 18

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 19

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

Since prices increase by 4% per year, to get a real return of 1%, we need a nominal return of 5% (4% + 1% = 5%). Therefore, the correct choice is C) 5%.

Question 20

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

Accepted Answer

Nominal value refers to the face value, or the amount of money or income stated in terms of its current value without adjusting for inflation or other factors. Real value, on the other hand, takes into account inflation or other changes in purchasing power over time. Marginal value refers to the additional value gained from a small increase in quantity, while external value typically refers to the value placed on a product or service by external market forces.

Quiz 2: The Key Principles of Economics