Question 1

The Fisher effect is the tendency for ______ interest rates to be ______ when inflation is high.
A)real;high
B)real;low
C)market;low
D)nominal;high

Accepted Answer

The Fisher effect states that nominal interest rates will adjust to changes in inflation, thus keeping real interest rates relatively constant. As inflation increases, nominal rates will also increase to compensate for the loss of purchasing power of the currency. Therefore, when inflation is high, nominal interest rates will be high as well.

Question 2

To obtain a given real rate of return,lenders must charge a ______ nominal interest rate in the face of increasing inflation.
A)deflated
B)higher
C)lower
D)constant

Accepted Answer

As inflation increases, the purchasing power of money decreases, which means lenders need to charge a higher nominal interest rate to obtain the same real rate of return. Therefore, the best choice is B, higher.

Question 3

The tendency for nominal interest rates to be high when inflation is high and low when inflation is low is known as:
A)the consumer price index.
B)deflating.
C)shoe leather costs.
D)the Fisher effect.

Accepted Answer

The Fisher effect describes the tendency for nominal interest rates to adjust in response to changes in inflation, such that real interest rates remain relatively constant. If inflation expectations rise, nominal interest rates will rise to compensate and maintain the same real interest rate. Conversely, if inflation is expected to fall, nominal interest rates will fall as well.

Question 4

Inflation-protected bonds guarantee investors:
A)no real wealth loss in the event of unexpectedly high inflation.
B)above average real returns.
C)a fixed nominal rate of return.
D)an above average rate of inflation.

Accepted Answer

Inflation-protected bonds, also known as TIPS (Treasury Inflation-Protected Securities), guarantee investors that the value of their investment will keep pace with inflation. This means that in the event of unexpectedly high inflation, the bond's principal will be adjusted upwards to maintain its real value, ensuring that investors do not suffer a loss in purchasing power. Therefore, option A is the correct answer.

Question 5

An investor purchasing an inflation protected bond with a fixed annual real return of 1.75 percent will earn a nominal annual return of ______ percent if the actual inflation rate turns out to be 3.25 percent.
A)1.50%
B)1.86%
C)5.00%
D)5.69%

Accepted Answer

The answer of An investor purchasing an inflation protected bond...

Question 6

The nominal return on an inflation-protected bond equals a fixed real return:
A)plus the actual rate of inflation.
B)minus the actual rate of inflation.
C)divided by the price level.
D)plus the expected rate of inflation.

Accepted Answer

The attractive feature of inflation-protected bonds is they add an inflation premium to a known real return.

Quiz 16: Inflation and the Price Level

The Fisher effect is the tendency for interest rates to be when inflation is high.

To obtain a given real rate of return,lenders must charge a ______ nominal interest rate in the face of increasing inflation.

The tendency for nominal interest rates to be high when inflation is high and low when inflation is low is known as:

Inflation-protected bonds guarantee investors:

An investor purchasing an inflation protected bond with a fixed annual real return of 1.75 percent will earn a nominal annual return of ______ percent if the actual inflation rate turns out to be 3.25 percent.

The nominal return on an inflation-protected bond equals a fixed real return: