Question 1

If inflationary expectations are increasing,we would expect that the nominal interest rate would also be increasing,holding all else constant.

Accepted Answer

Inflationary expectations can lead to higher nominal interest rates as lenders demand higher returns to compensate for the loss of purchasing power due to inflation. This relationship is commonly known as the Fisher effect. Therefore, if inflationary expectations are rising, we would expect the nominal interest rate to increase as well, all else constant.

Question 2

When prices are rising,which of the following will be true?
A)The real interest rate will be lower than the nominal interest rate.
B)The real interest rate will be negative.
C)The real interest rate will be higher than the nominal interest rate.
D)The nominal interest rate will be negative.

Accepted Answer

The real interest rate is adjusted for inflation, so when prices are rising (indicating inflation), the real interest rate will be lower than the nominal interest rate, which does not account for inflation.

Question 3

If inflation is higher than expected,this helps borrowers (by reducing the real interest rate they pay)and hurts lenders (by reducing the real interest rate they receive).

Accepted Answer

Inflation reduces the purchasing power of money, so if inflation is higher than expected, the nominal interest rate on a loan may not keep up with the increase in prices, effectively reducing the real interest rate the borrower pays. On the other hand, lenders may not be able to charge a high enough nominal interest rate to compensate for inflation, thereby reducing their real interest rate received.

Question 4

Deflation occurs when
A)there is a sustained increase in the price level.
B)there is a one-time increase in the price level.
C)there is a decline in the price level.
D)there is a decrease in the expected rate of inflation.

Accepted Answer

Deflation occurs when there is a decline in the price level, meaning the overall level of prices is falling over a sustained period of time. This is generally seen as the opposite of inflation, which is a sustained increase in the price level. A one-time increase in the price level would not be considered a deflationary event. A decrease in the expected rate of inflation may mean that prices are still rising, just not as quickly as expected, so it is not the same as deflation.

Question 5

The real rate of interest is
A)the nominal interest rate plus the inflation rate.
B)the nominal interest rate minus the inflation rate.
C)the interest rate determined by the supply and demand in the money market.
D)the nominal interest rate.

Accepted Answer

The real rate of interest is calculated by subtracting the inflation rate from the nominal interest rate. This provides a more accurate picture of the actual return on an investment, as it takes into account the effect of inflation on the purchasing power of the money invested.

Question 6

The nominal interest rate will be less than the real interest rate when
A)the rate of inflation is positive but decreasing.
B)the rate of inflation is positive and increasing.
C)the rate of inflation is negative.
D)the real interest rate is negative.

Accepted Answer

The nominal interest rate will be less than the real interest rate when the rate of inflation is negative. This is because the real interest rate is adjusted for inflation, so if inflation is negative (deflation), the real interest rate would be higher than the nominal rate.

Question 7

If the nominal interest rate is 6% and the inflation rate is 9%,then the real interest rate is
A)-3%.
B)3%.
C)6.67%.
D)15%.

Accepted Answer

The real interest rate is calculated as nominal interest rate - inflation rate. Therefore, the real interest rate in this case would be -3% (6% - 9%).

Question 8

You lend $5,000 to a friend for one year at a nominal interest rate of 10%.Inflation during that year is 5%.As a result,you will receive ________ at the end of the year,but that money has a purchasing power of ________.
A)$5,050; $5,025
B)$5,100; $5,050
C)$5,500; $5,250
D)$6,000; $5,500

Accepted Answer

The answer of You lend $5,000 to a friend for...

Question 9

During a deflationary period
A)the nominal interest rate is less than the real interest rate.
B)the real interest rate is less than the nominal interest rate.
C)the price level rises.
D)the nominal interest rate does not change.

Accepted Answer

During a deflationary period, the price level decreases, which increases the purchasing power of money. This means that the real interest rate (which accounts for inflation) is higher than the nominal interest rate (which does not account for inflation), as the real value of money lent or saved increases more than expected due to falling prices.

Question 10

If the nominal interest rate is 6% and the inflation rate is 2% then the real interest rate is
A)8%.
B)4%.
C)3%.
D)2%.
E)1%.

Accepted Answer

Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 6% - 2%
Real interest rate = 4%

Question 11

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.If inflation over the year is 2%,what is the real interest rate you are paying?
A)2%
B)2.5%
C)3%
D)5%

Accepted Answer

The real interest rate can be calculated using the formula: real interest rate = nominal interest rate - inflation rate. Therefore, the real interest rate is 5% - 2% = 3%.

Question 12

Suppose you lend $1,000 at an interest rate of 10 percent over the next year.If the expected real interest rate at the beginning of the loan contract is 4 percent,then what rate of inflation over the upcoming year would be most beneficial to you as the lender? An inflation rate
A)equal to 0 percent.
B)greater than 6 percent.
C)equal to 6 percent.
D)equal to 4 percent.

Accepted Answer

The answer of Suppose you lend $1,000 at an interest...

Question 13

Suppose you borrow $1,000 at an interest rate of 12 percent.If the expected real interest rate is 5 percent,then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation
A)equal to 0 percent.
B)greater than 7 percent.
C)equal to 7 percent.
D)less than 7 percent.

Accepted Answer

The most beneficial rate of inflation for a borrower is one that is higher than the difference between the nominal interest rate (12 percent) and the expected real interest rate (5 percent), which is 7 percent. A higher inflation rate reduces the real value of the money repaid, benefiting the borrower.

Question 14

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.The CPI over that year rises from 180 to 200.What is the real interest rate you are paying?
A)15%
B)5%
C)-1.1%
D)-6.1%

Accepted Answer

To calculate the real interest rate, we need to use the formula:

Real interest rate = [(1 + nominal interest rate)/(1 + inflation rate)] - 1

First, we need to calculate the inflation rate:

Inflation rate = [(new CPI - old CPI) / old CPI] x 100
Inflation rate = [(200 - 180) / 180] x 100
Inflation rate = 11.11%

Now we can plug in the values to calculate the real interest rate:

Real interest rate = [(1 + 0.05)/(1 + 0.1111)] - 1
Real interest rate = -0.061 or -6.1%

Therefore, the real interest rate you are paying is -6.1%, which means that the value of your loan has actually decreased by 6.1% due to inflation.

Question 15

The nominal interest rate plus the inflation rate equals the real interest rate.

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate, not by adding them together.

Question 16

If you want to earn a real interest rate of 3% on money you lend,and you expect that inflation will be 2%,what nominal rate of interest will you charge?
A)1%
B)5%
C)6%
D)9%

Accepted Answer

To find the nominal interest rate when you want a real interest rate of 3% and expect inflation to be 2%, you use the formula: nominal interest rate = real interest rate + inflation rate. Therefore, 3% + 2% = 5%.

Question 17

You agree to lend $1,000 for one year at a nominal interest rate of 10%.You anticipate that inflation will be 4% over that year.If inflation is instead 3% over that year,which of the following is true?
A)The real interest rate you earn on your money is lower than you expected.
B)The purchasing power of the money that will be repaid to you will be lower than you expected.
C)The person who borrowed the $1,000 will be worse off as a result of the unanticipated decrease in inflation.
D)The real interest rate you earn on your money will be negative.

Accepted Answer

The real interest rate is calculated as the nominal interest rate minus the inflation rate. If inflation decreases from the expected 4% to 3%, the real interest rate increases, making the lender better off (earning more in real terms) and the borrower worse off, as they are paying back money that is worth more in terms of purchasing power.

Question 18

You lend $5,000 to a friend for one year at a nominal interest rate of 10%.The CPI over that year rises from 180 to 190.What is the real rate of interest you will earn?
A)0%
B)4.4%
C)5.5%
D)5.8%

Accepted Answer

To find the real rate of interest, we need to adjust for inflation.

Real interest rate = (1 + nominal interest rate)/(1 + inflation rate) -1

In this case, nominal interest rate = 10% and inflation rate = (190-180)/180 = 5.56%

Real interest rate = (1 + 0.1)/(1 + 0.0556) -1 = 4.38%

Therefore, the real rate of interest you will earn is 4.4%, which is answer choice B.

Question 19

When deflation occurs
A)the real interest rate is greater than the nominal interest rate.
B)the nominal interest rate is greater than the real interest rate.
C)the nominal interest rate is equal to the real interest rate and inflation is negative.
D)the nominal interest rate is equal to the real interest rate and inflation is positive.

Accepted Answer

Deflation implies a decrease in the general price level, which increases the real value of money. Therefore, the real interest rate (which accounts for inflation) becomes greater than the nominal interest rate (which does not account for inflation) during deflation.

Question 20

The nominal interest rate minus the inflation rate equals the real interest rate.

Accepted Answer

This is the definition of the real interest rate. It represents the true return on an investment after adjusting for inflation.

Quiz 13: Unemployment and Inflation

If inflationary expectations are increasing,we would expect that the nominal interest rate would also be increasing,holding all else constant.

When prices are rising,which of the following will be true?

If inflation is higher than expected,this helps borrowers (by reducing the real interest rate they pay)and hurts lenders (by reducing the real interest rate they receive).

Deflation occurs when

The real rate of interest is

The nominal interest rate will be less than the real interest rate when

If the nominal interest rate is 6% and the inflation rate is 9%,then the real interest rate is

You lend $5,000 to a friend for one year at a nominal interest rate of 10%.Inflation during that year is 5%.As a result,you will receive at the end of the year,but that money has a purchasing power of .

During a deflationary period

If the nominal interest rate is 6% and the inflation rate is 2% then the real interest rate is

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.If inflation over the year is 2%,what is the real interest rate you are paying?

Suppose you lend $1,000 at an interest rate of 10 percent over the next year.If the expected real interest rate at the beginning of the loan contract is 4 percent,then what rate of inflation over the upcoming year would be most beneficial to you as the lender? An inflation rate

Suppose you borrow $1,000 at an interest rate of 12 percent.If the expected real interest rate is 5 percent,then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.The CPI over that year rises from 180 to 200.What is the real interest rate you are paying?

The nominal interest rate plus the inflation rate equals the real interest rate.

If you want to earn a real interest rate of 3% on money you lend,and you expect that inflation will be 2%,what nominal rate of interest will you charge?

You agree to lend $1,000 for one year at a nominal interest rate of 10%.You anticipate that inflation will be 4% over that year.If inflation is instead 3% over that year,which of the following is true?

You lend $5,000 to a friend for one year at a nominal interest rate of 10%.The CPI over that year rises from 180 to 190.What is the real rate of interest you will earn?

When deflation occurs

The nominal interest rate minus the inflation rate equals the real interest rate.