Question 1

What is Iceland's real GDP if its nominal GDP is $25.9 billion (in current US$) and the GDP deflator is 124.5?

Accepted Answer

Real GDP can be calculated by dividing Nominal GDP by the GDP deflator and then multiplying it by 100. So, Real GDP = (Nominal GDP/GDP deflator) x 100
Real GDP = (25.9 billion/124.5) x 100
Real GDP = $20.8 billion. Therefore, option C is the correct answer.

Question 2

Hyperinflation is:

Accepted Answer

Hyperinflation refers to an extremely high rate of inflation, generally characterized by a monthly inflation rate of 50% or higher. This leads to a rapid decrease in the value of a currency, resulting in skyrocketing prices and making it difficult for people to afford basic necessities.

Question 3

Which of the following is an example of hyperinflation?

Accepted Answer

Hyperinflation is a situation where the rate of inflation becomes extremely high, usually over 50% per month, leading to a rapid decline in the value of a country's currency. A rate of inflation of more than 7,500% in one year can be considered hyperinflation. Therefore, option C is the correct answer. The other options do not represent hyperinflation.

Question 4

In 2014, Venezuela experienced inflation of about 69%. In 2015, the inflation rate rose to around 181%, and by 2017, the inflation rate was over 4,000%. This scenario describes:

Accepted Answer

The rapid increase in inflation rates over the years (69%, 181%, and over 4,000%) indicates hyperinflation, which is a situation where prices rise rapidly and uncontrollably, leading to a rapid decrease in the purchasing power of money.

Question 5

Menu costs are the:

Accepted Answer

Menu costs refer to the expenses that businesses incur when they change their prices, such as updating menus, advertising new prices, and informing customers. These costs are the marginal costs of adjusting prices and do not include the total costs of producing goods and services. Choice (A) is incorrect because it refers specifically to restaurant meals and does not apply to all businesses. Choice (B) is too broad and does not specifically describe menu costs. Choice (D) is incorrect because it is too general and does not specifically address the costs of adjusting prices.

Question 6

The real interest rate is the:

Accepted Answer

The real interest rate is the interest rate adjusted for inflation or changes in purchasing power. Option A is incorrect because it is the nominal interest rate, which does not take into account changes in the price level. Option C is incorrect because deflation, or a decrease in the overall price level, would lead to a higher real interest rate. Option D is incorrect because taxes are not related to the calculation of the real interest rate.

Question 7

The nominal interest rate is the:

Accepted Answer

Nominal interest rate is the stated interest rate without any adjustment made for inflation. It is the rate at which money grows with invested funds, without taking into account the impact of inflation on the future value of money.

Question 8

The real interest rate is the:

Accepted Answer

The real interest rate is the nominal interest rate minus the rate of inflation. This is because the nominal interest rate reflects both the real interest rate and the expected inflation rate. By subtracting the inflation rate from the nominal rate, we can isolate the real rate.

Question 9

Meredith has purchased a guaranteed income certificate (GIC) in Canada. This financial instrument pays her 1% interest per year. However, inflation during the same year is 2%. What was Meredith's nominal interest rate on her GIC?

Accepted Answer

The nominal interest rate is the rate of interest before adjustment for inflation. In this case, Meredith's GIC pays her 1% interest per year, which is the nominal rate.

Question 10

Meredith has purchased a guaranteed income certificate (GIC) in Canada. This financial instrument pays her 1% interest per year. However, inflation during the same year is 2%. What was Meredith's real interest rate on her GIC?

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In this case, real interest rate = 1% - 2% = -1%. Therefore, Meredith's GIC actually lost value due to inflation.

Question 11

You open a savings account that pays 0.75% interest a year. What is your real rate of return if the inflation rate is 1%?

Accepted Answer

The real rate of return is calculated by subtracting the inflation rate from the nominal interest rate. Therefore, 0.75% - 1% = -0.25%.

Question 12

You purchase a certificate of deposit that pays an advertised rate of 2.25% interest per year. What is your nominal rate of return if the actual inflation rate is 1.65%?

Accepted Answer

The nominal rate of return is the rate of return without adjusting for inflation, which in this case is the advertised rate of 2.25%.

Question 13

You purchase a certificate of deposit that pays an advertised rate of 2.25% interest per year. What is your real rate of return if the actual inflation rate is 1.65%?

Accepted Answer

To find the real rate of return, we must subtract the inflation rate from the advertised rate of return. 
Real rate of return = Advertised rate - Inflation rate 
= 2.25% - 1.65% 
= 0.6% 
Therefore, the real rate of return is 0.6%, which is option D.

Question 14

You open a savings account that pays 1.67% interest a year. What is your real rate of return if the actual inflation rate is 1.67%?

Accepted Answer

The real rate of return is calculated by adjusting the nominal rate of return (interest rate) for inflation. If both the interest rate and inflation rate are 1.67%, the real rate of return is effectively 0% because the purchasing power of the interest earned is exactly offset by the inflation.

Question 15

You purchase a certificate of deposit that earns an advertised rate of 1.75% interest per year. What is your real rate of return if the actual inflation rate is 1.9%?

Accepted Answer

To calculate the real rate of return, we subtract the inflation rate from the advertised rate of return. In this case: 
Real rate of return = 1.75% - 1.9% = -0.15%

This means that the actual purchasing power of your investment is decreasing, meaning you are losing money in real terms. Therefore, the best choice would be not to invest in this certificate of deposit or to look for an investment with a higher real rate of return.

Question 16

You purchase a certificate of deposit and expect an inflation rate of 1.5% over the next year. Your nominal rate of interest is 2.25%. What is your expected real rate of return?

Accepted Answer

The real rate of return is calculated by subtracting the expected inflation rate from the nominal interest rate. Therefore, the expected real rate of return is 0.75% (2.25% - 1.5%).

Question 17

You purchase a certificate of deposit and expect an inflation rate of 1.5% over the next year. Your nominal rate of interest is 2.25%. Over the next year, the actual inflation rate turns out to be 1.75%. What is your actual real rate of return?

Accepted Answer

The actual real rate of return is calculated by subtracting the actual inflation rate from the nominal interest rate: 2.25% - 1.75% = 0.5%.

Question 18

You purchase a certificate of deposit and expect an inflation rate of 1.25% over the next year. Your nominal rate of interest is 2.1%. What is your expected real rate of return?

Accepted Answer

To find the expected real rate of return, we must subtract the inflation rate from the nominal rate of interest: 
Expected real rate of return = Nominal rate of interest - Inflation rate
= 2.1% - 1.25%
= 0.85%
Therefore, the expected real rate of return is 0.85%. Option A is the correct choice.

Question 19

You purchase a certificate of deposit and expect an inflation rate of 1.25% over the next year. Your nominal rate of interest is 2.1%. Over the next year, the actual inflation rate turns out to be 0.95%. What is your actual real rate of return?

Accepted Answer

Nominal rate of interest = 2.1%
Expected inflation rate = 1.25%
Real rate of interest = Nominal rate of interest - Expected inflation rate
Real rate of interest = 2.1% - 1.25%
Real rate of interest = 0.85%
Actual inflation rate = 0.95%
Actual real rate of return = Nominal rate of interest - Actual inflation rate
Actual real rate of return = 2.1% - 0.95%
Actual real rate of return = 1.15%
Therefore, the actual real rate of return is 1.15%.

Question 20

You open a savings account that earns a nominal interest rate of 1.3% interest a year. The current consumer price index is 117. In one year, the consumer price index is expected to go to 120. What is your expected real rate of return?

Accepted Answer

The real rate of return is calculated by adjusting the nominal rate for inflation. The expected inflation rate is (120 - 117) / 117 = 2.56%. The real rate of return = 1.3% - 2.56% = -1.26%.

Quiz 24: Inflation and Money

What is Iceland's real GDP if its nominal GDP is $25.9 billion (in current US$) and the GDP deflator is 124.5?

Hyperinflation is:

Which of the following is an example of hyperinflation?

In 2014, Venezuela experienced inflation of about 69%. In 2015, the inflation rate rose to around 181%, and by 2017, the inflation rate was over 4,000%. This scenario describes:

Menu costs are the:

The real interest rate is the:

The nominal interest rate is the:

The real interest rate is the:

Meredith has purchased a guaranteed income certificate (GIC) in Canada. This financial instrument pays her 1% interest per year. However, inflation during the same year is 2%. What was Meredith's nominal interest rate on her GIC?

Meredith has purchased a guaranteed income certificate (GIC) in Canada. This financial instrument pays her 1% interest per year. However, inflation during the same year is 2%. What was Meredith's real interest rate on her GIC?

You open a savings account that pays 0.75% interest a year. What is your real rate of return if the inflation rate is 1%?

You purchase a certificate of deposit that pays an advertised rate of 2.25% interest per year. What is your nominal rate of return if the actual inflation rate is 1.65%?

You purchase a certificate of deposit that pays an advertised rate of 2.25% interest per year. What is your real rate of return if the actual inflation rate is 1.65%?

You open a savings account that pays 1.67% interest a year. What is your real rate of return if the actual inflation rate is 1.67%?

You purchase a certificate of deposit that earns an advertised rate of 1.75% interest per year. What is your real rate of return if the actual inflation rate is 1.9%?

You purchase a certificate of deposit and expect an inflation rate of 1.5% over the next year. Your nominal rate of interest is 2.25%. What is your expected real rate of return?

You purchase a certificate of deposit and expect an inflation rate of 1.5% over the next year. Your nominal rate of interest is 2.25%. Over the next year, the actual inflation rate turns out to be 1.75%. What is your actual real rate of return?

You purchase a certificate of deposit and expect an inflation rate of 1.25% over the next year. Your nominal rate of interest is 2.1%. What is your expected real rate of return?

You purchase a certificate of deposit and expect an inflation rate of 1.25% over the next year. Your nominal rate of interest is 2.1%. Over the next year, the actual inflation rate turns out to be 0.95%. What is your actual real rate of return?

You open a savings account that earns a nominal interest rate of 1.3% interest a year. The current consumer price index is 117. In one year, the consumer price index is expected to go to 120. What is your expected real rate of return?