Question 1

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 calculated as the difference between the sale price of an asset and its purchase price, without adjusting for inflation. Real capital gains, which do adjust for inflation, are not subject to taxation. Real and nominal capital losses can be used to offset capital gains, but they cannot be deducted from regular income.

Question 2

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 3

After a particular loan has been paid off,neither the borrower nor the lender has lost purchasing power.Therefore,it must be t 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 the loan has been paid off and both the borrower and lender have the same purchasing power as before, then the nominal interest rate paid on the loan was equal to the expected inflation rate. Therefore, the actual inflation rate must also have been equal to the expected inflation rate.

Question 4

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 leads to a decrease in the purchasing power of money over time. Borrowers who have signed a fixed nominal interest rate contract will benefit from inflation as they will be paying back a loan with money that has less purchasing power. On the other hand, lenders will lose out as the money repaid to them will have less purchasing power than the money they originally lent. Therefore, borrowers will hope for rising prices (inflation) while lenders will hope for falling prices (deflation).

Question 5

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 a borrower gains purchasing power as the result of a loan, it suggests that the inflation rate was higher than anticipated. This means that the money borrowed is worth less than expected, allowing the borrower to purchase more goods or services.

Question 6

Sharon buys some common stock in 1990 for $10,000 and sells it in 2000 for $15,000.During the same period,prices have risen by 75 percent.The net result of Sharon's stock purchases is that she will
A) pay no taxes because she earned negative real capital gains.
B) lose purchasing power and have to pay taxes anyway.
C) earn a real capital gain of $5,000 plus 75 percent.
D) earn a real capital gain of $15,000 minus 75 percent.

Accepted Answer

Sharon's nominal gain is $5,000 ($15,000 - $10,000). However, due to a 75% inflation rate, the real value of her initial investment has decreased. The real value of her initial $10,000 investment would need to be $17,500 by 2000 to maintain its purchasing power ($10,000 * 1.75). Since she sold for $15,000, she actually lost purchasing power. Despite this loss in real terms, she would still be liable for taxes on the nominal gain.

Question 7

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

The utility company is legally limited to a 10 percent rate of return, which means they may not be able to afford to expand their power generating capacity. Inflation may cause the cost of producing and distributing electricity to rise, but the utility company cannot increase its rates of return beyond the legal limitation. This may result in a supply-demand imbalance which can cause power shortages in the future.

Question 8

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 the actual inflation is less than the expected rate of inflation, the lender gains at the expense of the borrower. This is because the lender had expected to earn a higher interest rate to compensate for the expected higher inflation, but due to the lower inflation, the borrower ends up paying a higher real interest rate than expected, benefiting the lender.

Question 9

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 10

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

The difference between the purchase price and the sale price of a financial asset is known as capital gain, and it's the profit made by the investor. Dividends are the distribution of profits by companies to their shareholders, and investments refer to the action of investing money in something. While profit is a general term that refers to any amount earned as revenue from a transaction.

Question 11

Some economists believe that technological progress could be increased if the federal government
A) nationalized research facilities.
B) levied taxes on nominal capital gains.
C) levied taxes on real capital gains.
D) levied taxes on gross rather than net investment.

Accepted Answer

The answer of Some economists believe that technological progress could...

Question 12

When nominal interest rates are held below inflation rates,then households will have an incentive to
A) consume.
B) save.
C) purchase financial assets.
D) postpone current consumption plans.

Accepted Answer

When nominal interest rates are held below inflation rates, the real interest rates turn negative. This means that the return on savings will be lower than the rate of inflation, leading households to have an incentive to consume rather than to save. Therefore, the best choice is A) consume.

Question 13

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 sale price ($2,000) and the cost basis ($1,000), which is $1,000. There is no adjustment for inflation.

Question 14

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 individuals to invest in stocks and other financial assets, as the tax will reduce the amount of return they receive. This in turn can lead to reduced investment in the economy, which can ultimately slow economic growth.

Question 15

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 16

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 17

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 in this scenario is between the difference of real and nominal interest rates. The 12 percent interest rate in the 1980s was high in nominal terms, but when adjusted for inflation, the real interest rate was not as high. In contrast, the 7 percent interest rate in the late 1990s was low in nominal terms but higher in real terms due to inflation being lower during that time period.

Question 18

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

At the end of the six-month period, Phoebe will have to pay Rachel the original $100 loan plus 2 percent interest, which equals $102. However, prices have risen by 4 percent, so the purchasing power of Phoebe's $102 has decreased. In other words, she can buy fewer goods and services with the $102 than she could have six months ago. This means that purchasing power has been redistributed from Phoebe to Rachel, as Rachel's $102 has more purchasing power than it did six months ago, while Phoebe's $102 has less.

Question 19

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 20

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 the actual interest rates charged by lenders. Real interest rates are the nominal rate adjusted for inflation. If nominal rates are higher than real rates, it means that lenders anticipated inflation in the future. This is because they are charging a higher interest rate to compensate for the expected decrease in the value of the borrowed money due to inflation. Thus, option A is the correct answer. Options B, C, and D are incorrect because they suggest that deflation or falling prices were expected, which is not consistent with nominal rates being higher than real rates.

Quiz 6: The Goals of Macroeconomic Policy

The federal government collects 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 t that actual inflation was

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

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

Sharon buys some common stock in 1990 for $10,000 and sells it in 2000 for $15,000.During the same period,prices have risen by 75 percent.The net result of Sharon's stock purchases is that she will

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

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

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

Some economists believe that technological progress could be increased if the federal government

When nominal interest rates are held below inflation rates,then households will have an incentive to

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

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

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

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

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

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.

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

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