Question 1

If an investor had a $25,000 long-term capital gain on a $100,000 investment from 1984 to 2010,her real rate of return was most likely
A) equal to the expected rate of inflation.
B) equal to the nominal rate of inflation.
C) zero.
D) negative.

Accepted Answer

The answer of If an investor had a $25,000 long-term...

Question 2

If actual inflation is less than the expected rate of inflation,then probably
A) the borrower gains at the expense of the lender.
B) neither the borrower nor the lender gains.
C) the lender gains at the expense of the borrower.
D) the purchasing power of the borrower is increased.

Accepted Answer

If actual inflation is less than the expected rate of inflation, then the lender gains at the expense of the borrower. This is because the borrower had agreed to pay back the loan with inflated dollars, but since the actual inflation was less than what was expected, the borrower ended up paying back the loan with less inflated dollars. As a result, the lender receives less real value than was anticipated.

Question 3

The difference between the purchase price of a financial asset and the sale price of the asset is called a(n)
A) capital gain.
B) dividend.
C) profit.
D) investment.

Accepted Answer

Capital gain is the correct term for the difference between the purchase price and the sale price of a financial asset.

Question 4

Over the past few decades,nominal interest rates have been higher than real rates of interest.This means that
A) lenders must have expected inflation.
B) borrowers must have expected deflation.
C) lenders must have expected prices to fall.
D) borrowers must have expected prices to fall.

Accepted Answer

Nominal interest rates are composed of both the real rate of interest and expected inflation rates. If nominal rates are consistently higher than real rates, then lenders must have been expecting inflation to occur.

Question 5

Rachel agrees to lend Phoebe $100 for six months and charges her interest of 2 percent.At the end of the six-month period,prices have risen by 4 percent.
A) Purchasing power has been redistributed to Rachel.
B) No purchasing power has been redistributed.
C) Purchasing power has been redistributed to Phoebe.
D) Both Rachel and Phoebe received extra purchasing power.

Accepted Answer

The 2 percent interest charged by Rachel means that Phoebe owes $102 at the end of the six-month period. With the 4 percent increase in prices, the purchasing power of the $100 loan has decreased, while the amount Phoebe owes Rachel remains the same. This means that purchasing power has been redistributed from Phoebe to Rachel.

Question 6

The federal government collects taxes on
A) real capital gains.
B) nominal capital gains.
C) real capital losses.
D) nominal capital losses.

Accepted Answer

The federal government collects taxes on nominal capital gains, which are profits earned from the sale of an asset that has increased in value over time. Real capital gains, on the other hand, are adjusted for inflation and are not subject to taxation. Real capital losses and nominal capital losses can be used to offset capital gains and reduce tax liability.

Question 7

If inflation is expected by both borrowers and lenders,then we would expect
A) real rates to be higher than nominal rates of interest.
B) real rates to be equal to nominal rates of interest.
C) real rates to be lower than nominal rates of interest.
D) nominal rates of interest to be less than the expected inflation rate.

Accepted Answer

If both borrowers and lenders expect inflation, lenders will demand higher nominal interest rates to account for the expected loss of purchasing power. However, borrowers will also be willing to pay higher nominal rates since they know that the money they receive today will be worth less in the future due to expected inflation. As a result, nominal interest rates will be higher than real interest rates, which account for inflation. Therefore, real rates will be lower than nominal rates of interest.

Question 8

Economists feel that taxing nominal capital gains imposes costs on the economy due to
A) increased consumption.
B) reduced consumption.
C) increased investment.
D) reduced investment.

Accepted Answer

Taxing nominal capital gains reduces the incentive for investors to take risks and sell investments that have increased in value, which can lead to reduced investment and potentially slower economic growth.

Question 9

Americans viewed the 12 percent mortgage interest rates of the 1980s as exorbitantly high while they considered the 7 percent mortgage interest rates of the late 1990s as reasonable.This represents a confusion of
A) actual and expected inflation.
B) real versus nominal inflation.
C) real versus expected mortgage payments.
D) real versus nominal interest rates.

Accepted Answer

The confusion is between real (adjusted for inflation) and nominal (not adjusted for inflation) interest rates. The 12 percent interest rate in the 1980s was high in nominal terms, but in real terms, it was not as high because inflation was also high. Conversely, the 7 percent interest rate in the late 1990s was low in nominal terms, but in real terms, it was higher because inflation was lower.

Question 10

The arithmetic difference between the nominal rate of interest and the expected rate of inflation is the
A) expected interest rate.
B) real interest rate.
C) implied interest rate.
D) contractual interest rate.

Accepted Answer

The arithmetic difference between the nominal rate of interest and the expected rate of inflation is the real interest rate. This is because it represents the true increase in purchasing power that an investor or lender can expect from their investment or loan.

Question 11

If the nominal interest rate was 12 percent and the inflation rate was 10 percent in 1980,while the nominal interest rate was 7 percent and the inflation rate was 2 percent in 2001,then
A) real rates were higher in 2001.
B) real rates were higher in 1980.
C) credit was more expensive in 1980.
D) credit was cheaper in 2001 because the nominal rate was lower.

Accepted Answer

The real interest rate can be roughly calculated as the nominal interest rate minus the inflation rate. For 1980, the real interest rate is 2 percent (12% - 10%), and for 2001, it is 5 percent (7% - 2%). Therefore, real rates were higher in 2001.

Question 12

If an investor had a $100,000 long-term capital gain on a $100,000 investment from 1984 to 2010,her real rate of return was most likely
A) equal to the expected rate of inflation.
B) positive.
C) very near zero..
D) negative.

Accepted Answer

The answer of If an investor had a $100,000 long-term...

Question 13

Inflation affects borrowers and lenders differently.After signing a contract with a fixed nominal interest rate,it can be expected that
A) borrowers will hope that prices fall.
B) lenders will hope that prices rise.
C) lenders will hope that the purchasing power of money will fall.
D) borrowers will hope that prices rise.

Accepted Answer

Inflation causes the prices of goods and services to rise over time. This means that the value of money decreases. In the case of borrowers, inflation can benefit them as the real value of their debt decreases. This is because they are repaying their debt with money that has less purchasing power. On the other hand, lenders will be negatively affected by inflation as the real value of their loan decreases. This is because they will be receiving repayment in money that has less purchasing power than at the time of the loan agreement. Therefore, borrowers will hope that prices rise while lenders will hope that prices fall.

Question 14

If borrowers and lenders expect a higher rate of inflation,
A) nominal interest rates should decrease.
B) nominal interest rates should remain constant.
C) nominal interest rates should increase.
D) real interest rates should increase.

Accepted Answer

If borrowers and lenders expect a higher rate of inflation, they will demand higher nominal interest rates to compensate for the expected decrease in the purchasing power of money. This is because inflation erodes the value of money over time, so lenders will demand a higher nominal interest rate to maintain the same level of purchasing power. As a result, nominal interest rates should increase.

Question 15

The rate of interest written on a contract between a borrower and a lender is the
A) nominal interest rate.
B) real interest rate.
C) implied interest rate.
D) expected interest rate.

Accepted Answer

The nominal interest rate is the rate that is explicitly stated on the contract between the borrower and lender. It does not take into account inflation or any other factors that may affect the true cost of borrowing or the true return on the investment for the lender.

Question 16

If expected inflation is 12 percent and the publicly regulated electric utility company is legally limited to a 10 percent rate of return,then we should expect
A) increased investment by the utility.
B) expansion of electric power generating capacity.
C) future power shortages.
D) excess investment by the electric utility.

Accepted Answer

If expected inflation is 12 percent and the utility company is limited to a 10 percent rate of return, it will be difficult for the company to make enough profit to cover the rising costs of inflation. This may lead to reduced investment by the company, which could result in power shortages in the future.

Question 17

If you purchased shares of common stock in 1990 for $1,000 and sold them for $2,000 in 2001 you would be liable for taxes on
A) $2,000.
B) $1,000 less the rate of inflation.
C) $1,000.
D) $2,000 less the rate of inflation.

Accepted Answer

The taxable gain is the difference between the purchase price and the selling price, which is $1,000. The rate of inflation does not affect the taxable gain in this situation.

Question 18

When a lender underestimates the rate of inflation,
A) purchasing power is redistributed to the lender.
B) purchasing power is redistributed to the borrower.
C) the real rate of interest will be higher than expected.
D) the nominal interest rate was set too low.

Accepted Answer

When a lender underestimates the rate of inflation, the real value of the money repaid by the borrower is less than anticipated, effectively redistributing purchasing power from the lender to the borrower.

Question 19

After a particular loan has been paid off,neither the borrower nor the lender has lost purchasing power.Therefore,it must be true that actual inflation was
A) greater than expected inflation.
B) equal to expected inflation.
C) less than expected inflation.
D) greater than the nominal rate of interest.

Accepted Answer

If both the borrower and the lender did not lose any purchasing power after the loan was paid off, it means that the inflation rate was accurately predicted and factored into the interest rate charged on the loan. Therefore, the actual inflation rate was equal to the expected inflation rate.

Question 20

If a borrower arbitrarily gains purchasing power as the result of a particular loan agreement,then
A) actual inflation was greater than expected inflation.
B) actual inflation was equal to expected inflation.
C) actual inflation was less than expected inflation.
D) the real interest rate was greater than the nominal interest rate.

Accepted Answer

If the borrower gains additional purchasing power as a result of a loan agreement, it means that they were able to buy more with the loan than they anticipated. This could occur if inflation was greater than what they expected at the time they took out the loan. Essentially, inflation erodes the value of money over time, making it less valuable as prices increase. Therefore, if the borrower expected inflation to be lower than what it actually was, they would have more buying power than anticipated.

Quiz 6: The Goals Of Macroeconomic Policy

If an investor had a $25,000 long-term capital gain on a $100,000 investment from 1984 to 2010,her real rate of return was most likely

If actual inflation is less than the expected rate of inflation,then probably

The difference between the purchase price of a financial asset and the sale price of the asset is called a(n)

Over the past few decades,nominal interest rates have been higher than real rates of interest.This means that

Rachel agrees to lend Phoebe $100 for six months and charges her interest of 2 percent.At the end of the six-month period,prices have risen by 4 percent.

The federal government collects taxes on

If inflation is expected by both borrowers and lenders,then we would expect

Economists feel that taxing nominal capital gains imposes costs on the economy due to

Americans viewed the 12 percent mortgage interest rates of the 1980s as exorbitantly high while they considered the 7 percent mortgage interest rates of the late 1990s as reasonable.This represents a confusion of

The arithmetic difference between the nominal rate of interest and the expected rate of inflation is the

If the nominal interest rate was 12 percent and the inflation rate was 10 percent in 1980,while the nominal interest rate was 7 percent and the inflation rate was 2 percent in 2001,then

If an investor had a $100,000 long-term capital gain on a $100,000 investment from 1984 to 2010,her real rate of return was most likely

Inflation affects borrowers and lenders differently.After signing a contract with a fixed nominal interest rate,it can be expected that

If borrowers and lenders expect a higher rate of inflation,

The rate of interest written on a contract between a borrower and a lender is the

If expected inflation is 12 percent and the publicly regulated electric utility company is legally limited to a 10 percent rate of return,then we should expect

If you purchased shares of common stock in 1990 for $1,000 and sold them for $2,000 in 2001 you would be liable for taxes on

When a lender underestimates the rate of inflation,

After a particular loan has been paid off,neither the borrower nor the lender has lost purchasing power.Therefore,it must be true that actual inflation was

If a borrower arbitrarily gains purchasing power as the result of a particular loan agreement,then