Question 1

If the nominal rate of interest is 6.5% and the inflation rate is 3.0%,what is the real rate of interest?
A) -9.5%
B) -3.5%
C) 1.5%
D) 3.5%
E) 9.5%

Accepted Answer

Real rate of interest = Nominal rate of interest - Inflation rate
= 6.5% - 3.0%
= 3.5%

Question 2

The stated interest rate on a loan is the
A) real interest rate.
B) nominal interest rate.
C) actual inflation rate.
D) expected inflation rate.

Accepted Answer

The stated interest rate on a loan is the nominal interest rate, which is the rate at which money grows in nominal terms, without adjusting for inflation. The real interest rate would adjust for inflation, while the actual and expected inflation rates refer to the inflation level, not the interest rate on the loan.

Question 3

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 4

Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest.If the inflation rate was 7%,what was the real interest rate you paid?
A) 17 percent
B) 10 percent
C) 7 percent
D) 3 percent

Accepted Answer

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

Nominal interest rate = $100/$1000 = 0.1 or 10%
Inflation rate = 7%

Real interest rate = nominal interest rate - inflation rate = 10% - 7% = 3%

Question 5

Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest.If the inflation rate was 4%,what was the real interest rate you paid?
A) 16 percent
B) 12 percent
C) 8 percent
D) 6 percent

Accepted Answer

The answer of Imagine that you borrow $5,000 for one...

Question 6

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

Accepted Answer

This is because lenders will demand a higher nominal interest rate to compensate for the expected loss in purchasing power of their loaned funds due to inflation. This is known as the Fisher effect.

Question 7

Suppose that at the beginning of a loan contract,the real interest rate is 4% and expected inflation is currently 6%.If actual inflation turns out to be 7% over the loan contract period,then
A) borrowers gain 1% of the loan value.
B) lenders gain 1% of the loan value.
C) borrowers lose 3% of the loan value.
D) lenders gain 3% of the loan value.

Accepted Answer

When actual inflation is higher than expected (7% instead of 6%), the real value of the money repaid is less than anticipated, benefiting borrowers by effectively reducing the real interest rate they pay.

Question 8

When actual inflation is less than expected inflation,
A) borrowers lose and lenders gain.
B) borrowers gain and lenders lose.
C) borrowers and lenders both gain.
D) borrowers and lenders both lose.

Accepted Answer

The answer of When actual inflation is less than expected...

Question 9

Real interest rates at times have been negative.Why would anyone lending money agree to a negative real interest rate?

Accepted Answer

The answer of Real interest rates at times have been...

Question 10

If inflation is positive and is perfectly anticipated,
A) those that borrow money lose.
B) those that lend money lose.
C) those that hold paper money lose.
D) no one in the economy loses.

Accepted Answer

Those who hold paper money lose as the value of their money decreases with inflation. However, borrowing and lending are unaffected in a perfectly anticipated inflation since the interest rate would adjust to match the inflation rate. Therefore, there are no winners or losers in the economy as a whole.

Question 11

Which of the following describes a situation in which the person is hurt by inflation?
A) a retiree whose pension is adjusted for inflation
B) a person who borrows money during a period when inflation is under-predicted
C) a person who lends money during a period when inflation is over-predicted
D) a person paid a fixed income during an inflationary period

Accepted Answer

A person who is paid a fixed income during an inflationary period will experience a decrease in their purchasing power because the prices of goods and services are increasing faster than their income. This means their income is worth less, as they can buy fewer goods and services with the same amount of money.

Question 12

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 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

Suppose that in 2012,all prices in the economy double and that all wages and salaries have also doubled.In 2012 you
A) are worse off than you were in 2011 as you can no longer afford to buy as many goods and services.
B) are better off than you were in 2011 as your salary is higher than it was in 2011 and you can now buy more goods and services.
C) are no better off or worse off than you were in 2011 as the purchasing power of your salary has remained the same.
D) cannot determine whether you are better off or worse off than you were in 2011, because the purchasing power of your salary cannot be determined.

Accepted Answer

Since both prices and wages have doubled, the purchasing power of your salary remains the same. In other words, you can buy the same amount of goods and services as you could in 2011 with the same amount of money. Therefore, you are neither better off nor worse off than you were in 2011.

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

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 17

The cost to firms of changing prices
A) is small even when there is rapid inflation.
B) is called a menu cost.
C) does not exist if inflation is perfectly anticipated.
D) all of the above

Accepted Answer

The cost to firms of changing prices is called a menu cost, which refers to the costs associated with changing prices, such as the cost of printing new menus, updating computer systems, and communicating the new prices to customers. It is not necessarily small even when there is rapid inflation, and it still exists even if inflation is perfectly anticipated.

Question 18

Which of the following is not an example of inflation causing a redistribution of income because the inflation was unanticipated?
A) A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation per year, and the actual rate of inflation ends up being 7 percent per year.
B) A worker receives a raise in salary that is less than the rate of inflation, because management under-predicted inflation.
C) Firms have to hire an extra worker to change prices in its store because of inflation.
D) A bank collects a lower amount of interest from a loan because inflation was under-predicted.

Accepted Answer

Option A, B, and D are all examples of inflation causing a redistribution of income because the inflation rate was different than anticipated, causing one party to benefit at the expense of another. However, option C does not involve a redistribution of income; rather, it is an example of firms incurring additional costs due to inflation.

Question 19

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 20

During the 1990s,Japan experienced periods of deflation and very low nominal interest rates,approaching zero percent.Why would lenders of money agree to a nominal interest rate of almost zero?

Accepted Answer

The answer of During the 1990s,Japan experienced periods of deflation...

Quiz 9: Unemployment and Inflation

If the nominal rate of interest is 6.5% and the inflation rate is 3.0%,what is the real rate of interest?

The stated interest rate on a loan is the

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

Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest.If the inflation rate was 7%,what was the real interest rate you paid?

Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest.If the inflation rate was 4%,what was the real interest rate you paid?

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

Suppose that at the beginning of a loan contract,the real interest rate is 4% and expected inflation is currently 6%.If actual inflation turns out to be 7% over the loan contract period,then

When actual inflation is less than expected inflation,

Real interest rates at times have been negative.Why would anyone lending money agree to a negative real interest rate?

If inflation is positive and is perfectly anticipated,

Which of the following describes a situation in which the person is hurt by inflation?

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

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

Suppose that in 2012,all prices in the economy double and that all wages and salaries have also doubled.In 2012 you

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

When deflation occurs,

The cost to firms of changing prices

Which of the following is not an example of inflation causing a redistribution of income because the inflation was unanticipated?

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 the 1990s,Japan experienced periods of deflation and very low nominal interest rates,approaching zero percent.Why would lenders of money agree to a nominal interest rate of almost zero?