Question 1

Celia wants to make an 8% real return on a loan that she is planning to make, and the expected inflation rate during the period of the loan is 5%. She should charge an interest rate of
A) 3%.
B) 5%.
C) 8%.
D) 13%.

Accepted Answer

Celia wants to earn a real return of 8%, which is above the expected inflation rate of 5%. Therefore, she should add the inflation rate to her desired real return to get the nominal interest rate she should charge. 
Nominal interest rate = Real interest rate + Inflation rate 
Nominal interest rate = 8% + 5% = 13% 
Therefore, Celia should charge a nominal interest rate of 13%. Choice D is the correct answer.

Question 2

You want to make a 10% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 10%. You should charge a nominal interest rate of
A) 0%.
B) 5%.
C) 10%.
D) 20%.

Accepted Answer

To achieve a 10% real return, you need to charge a nominal interest rate equal to the sum of the real return and the expected inflation rate. 
Nominal interest rate = Real return + Inflation rate 
Nominal interest rate = 10% + 10% 
Nominal interest rate = 20% 
Therefore, the best choice is D.

Question 3

Julio borrows $250 from Ricky. Ricky wants to make a 5% real return on his money, so they both agree on a 5% interest rate paid next year. Both don't anticipate the 5% inflation next year. In this case
A) Ricky is better off.
B) Julio will pay $15 a year from now on.
C) Julio is better off.
D) Ricky will receive more than 5% of real rate of return a year from now.

Accepted Answer

Julio is better off in this case because he will pay back $250 plus 5% interest, which equals $262.50. However, due to the 5% inflation, the real value of the money will have decreased by the same amount, leaving Ricky with the same purchasing power as before. This means that Ricky did not earn a 5% real return on his money, while Julio paid back less than the real value of the money he borrowed. Therefore, Julio is better off in this scenario.

Question 4

If the CPI in 2015 was 104.5 and the CPI in 2016 was 110.5, then the rate of inflation between 2015 and 2016 was
A) 5.4%.
B) 5.7%.
C) 6.5%.
D) 7.0%.

Accepted Answer

Inflation rate = [(CPI in 2016 - CPI in 2015) / CPI in 2015] x 100%

= [(110.5 - 104.5) / 104.5] x 100%

= 5.7%

Therefore, the answer is B) 5.7%.

Question 5

Which of the following statements is true?
A) Whether you gain or lose during a period of inflation depends on whether your income rises faster or slower than the prices of the things you buy.
B) Inflation that is higher than expected benefits creditors, and inflation that is lower than expected benefits debtors.
C) There are no costs or losses associated with anticipated inflation.
D) When unanticipated inflation occurs regularly, the degree of risk associated with investments in the economy decreases.

Accepted Answer

Inflation affects different people and groups differently. If your income rises faster than the prices of the things you buy, you gain during a period of inflation. Conversely, if your income rises slower than the prices of the things you buy, you lose during a period of inflation. This statement is true.

Answer: B 
 Creditors lend money and expect to be paid back with interest. When inflation is higher than expected, they are repaid in dollars that are worth less than they were when the loan was made, resulting in a benefit to the creditor. In contrast, debtors borrow money and will eventually have to repay what they owe. If inflation is lower than expected, they will repay their debts with dollars that are worth more than they anticipated when they borrowed the money, resulting in a benefit to the debtor. This statement is true.

Answer: C 
 This statement is false. Even anticipated inflation can have costs and losses for the economy, such as the costs of re-pricing changing economic conditions and the losses related to the difficulty of distinguishing "real" price changes from "purely" inflationary ones.

Answer: D 
 This statement is false. When unanticipated inflation occurs regularly, it can create a great deal of uncertainty and volatility in the economy. This can increase the degree of risk associated with investments in the economy rather than decreasing it.

Question 6

Which of the following statements is true?
A) An individual living on a fixed income is always made better off as a result of deflation.
B) Those individuals receiving welfare benefits have been harmed by inflation because increases in welfare payments have not kept pace with inflation.
C) Inflation will have no effect on an individual whose income is indexed to the inflation rate.
D) Everyone in society benefits from inflation.

Accepted Answer

The answer of Which of the following statements is true?
A)...

Question 7

Which of the following statements is true?
A) One benefit with any fixed-bundle index as a measure of the cost of living is that it does not account for substitutions that consumers might make in response to price changes.
B) The producer price index is considered to be a leading indicator of future inflation rates.
C) The best overall indicator of inflationary pressures in the economy is the CPI.
D) The consumer price index somewhat understates changes in the cost of living.

Accepted Answer

The producer price index (PPI) is considered a leading indicator of future inflation rates because it measures the average changes in prices received by domestic producers for their output, which often precede changes in consumer prices, thereby providing early signals of future inflation trends.

Question 8

If the CPI in period 1 is 125 and the CPI in period 2 is 150, then the rate of inflation between period 1 and period 2 is
A) 20%.
B) 25%.
C) 30%.
D) 50%.

Accepted Answer

The answer of If the CPI in period 1 is...

Question 9

If the CPI in 2015 was 112 and the CPI in 2016 was 116, then the rate of inflation between 2015 and 2016 was
A) 4.00%.
B) 3.64%.
C) 3.57%.
D) 3.45%.

Accepted Answer

To calculate the inflation rate between 2015 and 2016, we use the formula: 
Inflation rate = ((CPI in 2016 - CPI in 2015) / CPI in 2015) x 100%.

Plugging in the numbers, we get: 
Inflation rate = ((116 - 112) / 112) x 100% = 3.57%.

Therefore, the answer is C) 3.57%.

Question 10

Which of the following decreases the real interest rate?
A) an increase in the nominal interest rate, holding the inflation rate constant
B) an increase in both the nominal interest rate and the inflation rate by the same percentage points
C) an increase in the inflation rate, holding the nominal interest rate constant
D) a decrease in both the nominal interest rate and the inflation rate by the same percentage points

Accepted Answer

Inflation and real interest rates have an inverse relationship. If the inflation rate increases, holding the nominal interest rate constant, the real interest rate decreases. This is because the purchasing power of the nominal interest rate decreases as the general price level increases. Therefore, an increase in the inflation rate, holding the nominal interest rate constant, decreases the real interest rate.

Question 11

If the inflation rate is larger than the nominal interest rate, the real interest rate is
A) positive.
B) negative.
C) zero.
D) either positive or zero.

Accepted Answer

When the inflation rate is larger than the nominal interest rate, it means that the value of money is decreasing faster than the interest is accumulating. This results in a negative real interest rate, which means that the return on investment is not enough to compensate for the loss in purchasing power due to inflation.

Question 12

Which of the following is a cost of unanticipated inflation?
A) Debtors are made worse off.
B) Both debtors and creditors are made worse off.
C) The degree of risk associated with investments in the economy decreases.
D) Creditors are made worse off.

Accepted Answer

Unanticipated inflation makes creditors worse off because the money they receive in the future will have less purchasing power than they anticipated when they extended credit. Debtors, on the other hand, benefit from unanticipated inflation because the money they pay back in the future is worth less than what they originally borrowed. Therefore, A is incorrect and B is partially incorrect. Option C is also incorrect as unanticipated inflation increases the degree of risk associated with investments.

Question 13

Stopping inflation by inducing a recession
A) can only benefit the economy, because the price level will be reduced.
B) generates costs to society due to the recession.
C) will always outweigh the costs of the recession.
D) both A and C

Accepted Answer

While inducing a recession may reduce inflation in the short term, it comes at a cost to society through unemployment, reduced economic growth, and other negative impacts. Whether the benefits of reduced inflation outweigh these costs depends on the specific circumstances and the severity of the recession.

Question 14

If Homer is paid an interest rate of 2% on his savings, but the inflation rate is 12%, the real interest rate Homer earns is
A) -12%.
B) -10%.
C) 2%.
D) 14%.

Accepted Answer

The real interest rate is equal to the nominal interest rate minus the inflation rate. 
Therefore, Homer's real interest rate is 2% − 12% = −10%. This means that the inflation rate is eroding the value of Homer's savings, causing him to lose purchasing power over time.

Question 15

The CPI in period 1 is 200 and the CPI in period 2 is 150. The rate of inflation between period 1 and period 2 is
A) 75%.
B) -25%.
C) -50%.
D) -75%.

Accepted Answer

The rate of inflation is calculated as ((CPI in period 2 - CPI in period 1) / CPI in period 1) * 100. So, ((150 - 200) / 200) * 100 = -25%.

Question 16

The PPI is a price index that tends to be a leading indicator of
A) past economic performance.
B) unemployment trends.
C) future inflation rates.
D) nominal GDP.

Accepted Answer

The PPI (Producer Price Index) measures the average changes in prices received by domestic producers for their output, indicating the level of inflation in the economy. As prices of inputs for producers tend to increase before prices of final goods increase, the PPI tends to be a leading indicator of future inflation rates.

Question 17

The GDP deflator is the
A) broadest-based price index available.
B) price index used for the wholesale market.
C) difference between GDP and national income.
D) index used to measure deflation but not inflation.

Accepted Answer

The GDP deflator is a price index that measures the level of prices of all new, domestically produced, final goods and services in an economy, making it the broadest-based price index available.

Question 18

The real interest rate is the difference between ________ and ________.
A) the interest rate on a loan; the inflation rate
B) nominal interest rate; depreciation
C) inflation rate; GDP deflator
D) frictional inflation rate; structural inflation rate

Accepted Answer

The real interest rate is calculated as the nominal interest rate minus the inflation rate. This is because the nominal rate reflects both the inflation rate and the real rate of return, while the real rate represents only the actual increase in purchasing power. Therefore, the difference between the interest rate on a loan (nominal rate) and the inflation rate gives us the real interest rate.

Question 19

Drew wants to borrow $500 from Bob. Bob wants to make 4% real return on his money, so they both agree on an 4% interest rate paid next year. Both don't anticipate the -5% inflation next year. In this case
A) Drew will pay an 4% real interest rate.
B) Bob is better off.
C) Drew will pay an 13% nominal interest rate.
D) all of the above.

Accepted Answer

Given the -5% inflation, the real interest rate Bob earns is actually higher than the agreed 4% nominal rate. The real interest rate can be approximated by the formula: real interest rate ≈ nominal interest rate - inflation rate. Therefore, Bob earns a real interest rate of approximately 4% - (-5%) = 9%, making him better off than anticipated. Choices A and C are incorrect because Drew will pay a 4% nominal interest rate, not 13%, and the real interest rate for Bob is not 4% but higher due to negative inflation.

Question 20

Most economists consider the GDP deflator as ________ of inflationary pressures in the economy.
A) the least accurate measure
B) an overvalued measure
C) only valid as a wholesale price measure
D) the best overall indicator

Accepted Answer

The GDP deflator is considered the best overall indicator of inflationary pressures in the economy because it takes into account the prices of all goods and services produced domestically, including those sold to consumers, businesses, and the government. It is also calculated using a weighted average of price changes, making it more reflective of overall inflation than other measures such as the Consumer Price Index (CPI).

Quiz 22: Unemployment, Inflation, and Long-Run Growth

Celia wants to make an 8% real return on a loan that she is planning to make, and the expected inflation rate during the period of the loan is 5%. She should charge an interest rate of

You want to make a 10% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 10%. You should charge a nominal interest rate of

Julio borrows $250 from Ricky. Ricky wants to make a 5% real return on his money, so they both agree on a 5% interest rate paid next year. Both don't anticipate the 5% inflation next year. In this case

If the CPI in 2015 was 104.5 and the CPI in 2016 was 110.5, then the rate of inflation between 2015 and 2016 was

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

If the CPI in period 1 is 125 and the CPI in period 2 is 150, then the rate of inflation between period 1 and period 2 is

If the CPI in 2015 was 112 and the CPI in 2016 was 116, then the rate of inflation between 2015 and 2016 was

Which of the following decreases the real interest rate?

If the inflation rate is larger than the nominal interest rate, the real interest rate is

Which of the following is a cost of unanticipated inflation?

Stopping inflation by inducing a recession

If Homer is paid an interest rate of 2% on his savings, but the inflation rate is 12%, the real interest rate Homer earns is

The CPI in period 1 is 200 and the CPI in period 2 is 150. The rate of inflation between period 1 and period 2 is

The PPI is a price index that tends to be a leading indicator of

The GDP deflator is the

The real interest rate is the difference between and .

Drew wants to borrow $500 from Bob. Bob wants to make 4% real return on his money, so they both agree on an 4% interest rate paid next year. Both don't anticipate the -5% inflation next year. In this case

Most economists consider the GDP deflator as ________ of inflationary pressures in the economy.