Question 1

The late 1970s were characterized by

Accepted Answer

The late 1970s were characterized by high inflation rates which exceeded nominal interest rates. This means that borrowers were paying back loans with money that had less purchasing power than when they borrowed it, resulting in a net interest rate gain for debtors.

Question 2

The real interest rate equals the

Accepted Answer

The real interest rate is calculated by subtracting the rate of inflation from the nominal interest rate. This gives the actual return on an investment after accounting for the effects of inflation. Option A is incorrect because it adds the rate of expected inflation to the nominal interest rate, while option B divides the nominal interest rate by the rate of expected inflation. Option C subtracts the nominal interest rate from the rate of expected inflation, which is not the correct formula for the real interest rate calculation. Option E subtracts the rate of expected inflation from the nominal interest rate, which is opposite to the correct formula.

Question 3

Cost-push inflation is caused by

Accepted Answer

Cost-push inflation occurs when the supply side of the market experiences a decrease in aggregate supply, causing an increase in the cost of production. This can be due to factors such as a decrease in the availability of raw materials or an increase in the cost of production inputs. It is not caused by full employment of resources or excessive government spending, and it is not related to the demand side of the market.

Question 4

If you borrow $1,000 on credit cards at an annual interest rate of 10 percent, the inflation rate is 12 percent during the year, and the debt has to be paid back in 12 months, then

Accepted Answer

The inflation rate of 12 percent means that the value of each dollar decreases by 12 percent. Therefore, the dollars repaid will have less purchasing power than those borrowed, making it more difficult for the borrower to repay the loan. The bank's return will remain the same, but in real terms, the borrower will be worse off.

Question 5

Which of the following could contribute to cost-push inflation?

Accepted Answer

Higher wage demands by trade unions can increase the cost of production, which can lead to an increase in the prices of goods and services, contributing to cost-push inflation.

Question 6

When inflation is much higher than expected, which of the following is true?

Accepted Answer

When inflation is much higher than expected, real interest rates (which are adjusted for inflation) are lower than expected. This is because the nominal interest rate does not adjust immediately to the unexpected rise in inflation, thus reducing the purchasing power of the interest received.

Question 7

When the real interest rate is less than zero, then a

Accepted Answer

When the real interest rate is less than zero, the inflation rate is higher than the nominal interest rate. Thus, the value of money decreases, and the creditor will lose purchasing power.

Question 8

A variable-rate mortgage

Accepted Answer

A variable-rate mortgage has an interest rate that increases with inflation, meaning that as inflation rises, the interest rate on the mortgage will also go up. This can be beneficial for lenders who are able to charge more for loans in times of inflation, but it can be risky for borrowers who may not be able to afford the increased payments.

Question 9

Figure 11.2
 
-In Figure 11.2, the increase in equilibrium prices could represent

Accepted Answer

The increase in equilibrium prices is due to an increase in demand, which is known as demand-pull inflation. Cost-push inflation occurs when supply-side factors, such as increases in production costs, lead to higher prices. Wage-push inflation occurs when labor unions negotiate higher wages, leading to increased production costs and higher prices. Decreased supply or demand would cause a shift in the supply or demand curve, resulting in a new equilibrium price and quantity, but not necessarily inflation.

Question 10

Expected inflation

Accepted Answer

Expected inflation is not seen as a major problem if individuals and businesses can adjust their interest-rate expectations and income levels accordingly. This allows for planning and adjustments to mitigate the negative effects of inflation.

Question 11

Figure 11.3
 
-Figure 11.3 represents the demand and supply conditions of an economy. The leftward shift in the supply curve could be explained by

Accepted Answer

The leftward shift in the supply curve could be explained by a decrease in oil supplies as it would limit the availability of resources to produce goods and services, leading to a decrease in the overall supply. The other options are not directly related to changes in the supply curve.

Question 12

In which of the following decades did the United States experience the highest rate of peacetime inflation?

Accepted Answer

The 1970s saw the highest rate of peacetime inflation in the United States, with an annual inflation rate reaching as high as 13.3% in 1979. This was due to a variety of factors, including rising oil prices, government spending, and a growing money supply.

Question 13

If the nominal interest rate is 4 percent and the inflation rate is 7 percent, then the real interest rate equals

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. Therefore, 4% - 7% = -3%.

Question 14

When the economy is operating at full capacity, we might expect

Accepted Answer

When the economy is operating at full capacity, there is high demand for goods and services, which can cause demand-pull inflation. This occurs when demand exceeds the supply, leading to higher prices as businesses try to capture more profit.

Question 15

If increases in total spending are not offset by increases in the supply of goods and services, the average level of prices will rise. Which of the following is responsible?

Accepted Answer

Demand-pull inflation occurs when there is an increase in demand for goods and services that is not matched by a corresponding increase in supply, leading to an increase in prices. In this scenario, total spending is increasing, but there is not enough supply to meet the increased demand, causing prices to go up. Cost-push inflation occurs when costs of production increase and businesses pass those costs on to consumers through higher prices, profit-push pressures do not explain the situation, wage-push pressures occur when labor costs increase and businesses pass those increases on to consumers, and unemployment is not the cause of inflation but rather a result of economic conditions.

Question 16

Cost of living raises protect

Accepted Answer

Cost of living raises are pay increases provided to workers to match the rise in the cost of goods and services due to inflation. As inflation increases, the prices of goods and services also increase, making it more expensive for workers to maintain their standard of living on their current salary. Cost of living raises help protect workers from unexpected inflation by adjusting their salaries to match the increased cost of living. They do not protect businesses, consumers, or workers from expected inflation, as this inflation is already factored into prices and salaries.

Question 17

Annual inflation rates

Accepted Answer

Annual inflation rates tend to be higher in developing countries than in industrial countries. This is often due to factors such as less stable monetary policies, higher rates of money growth, and various supply-side constraints that can be more prevalent in developing economies.

Question 18

For a given year, the nominal interest rate is 9 percent, and inflation rises to 11 percent, a 4 percent higher rate than anticipated. Which group of people is made better off by the increase in the inflation rate?

Accepted Answer

Those who borrow at fixed interest rates are made better off by the increase in the inflation rate because they are able to pay back their loans with currency that is worth less than when they borrowed it. This effectively reduces the real value of their debt.

Question 19

Suppose Jeremy borrows $100 from Mike, at an interest rate of 7%. If the inflation rate over the year turns out to be 5%, which of the following is true?

Accepted Answer

The nominal interest rate is the rate at which the loan was given, which is 7%. The real interest rate adjusts the nominal rate for the effects of inflation, calculated as the nominal rate minus the inflation rate: 7% - 5% = 2%.

Question 20

Variable interest rates

Accepted Answer

Variable interest rates protect lenders against the risks associated with unexpected inflation by allowing the rate to adjust in response to changes in inflation, thus maintaining the real value of the returns on the loans they provide.

Quiz 11: Unemployment, Inflation, and Business Cycles