Question 1

The real interest rate equals the nominal interest rate ________ the inflation rate.
A) times
B) divided by
C) plus
D) minus

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. Therefore, the correct answer is letter D (minus).

Question 2

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 3

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 represents the actual interest rate charged without adjusting for inflation or other factors.

Question 4

Table 13-21
 $\begin{array}{|c|c|c|c|}
\hline && \text {Average Retail Price }\
&& \text { Unleaded Regular }\
&& \text {Gasoline}&\text { CPI }\
 \text { Year } & \text { Month } & \text { (centsper gallon) } & (1982-1984=100) \
\hline 1976 & \text { June } & 59.2 & 56.8 \
\hline 1981 & \text { September } & 137.6 & 93.2 \
\hline 1994 & \text { December } & 114.3 & 149.7 \
\hline 2011 & \text { October } & 340.0 & 226.9\
\hline
\end{array}$ Source: Energy Information Administration
-Refer to Table 13-21.The table above reports the consumer price index and the average U.S.retail price for unleaded regular gasoline for four different periods since 1976.Note that the gasoline prices are in cents per gallon.
Calculate the real average retail price of unleaded regular gasoline in 1982-1984 dollars.In which period were gasoline prices the highest in real terms? Also,calculate the real average retail price of unleaded regular gasoline in 2011 dollars.

Accepted Answer

The answer of Table 13-21
 \(\begin{array}{|c|c|c|c|}
\hline && \text {Average Retail...

Question 5

Nominal income is equal to real income if the CPI is less than 100.

Accepted Answer

Nominal income is not equal to real income if the CPI is less than 100. Real income takes into account inflation and adjusts for changes in purchasing power, whereas nominal income is just the raw dollar amount earned without considering the effects of inflation. If the CPI is less than 100 (which is rare), it means that the price level is lower than the base year used to calculate the CPI, but real income can still be different from nominal income due to changes in purchasing power.

Question 6

Table 13-19
 $\begin{array}{|c|c|c|}
\hline \text { Year } & \begin{array}{c}
\text { Nominal Average Hourly } \
\text { Earnings }
\end{array} & \begin{array}{c}
\text { CPI } \
(\mathbf{1 9 8 2 - 1 9 8 4}=\mathbf{1 0 0})
\end{array} \
\hline 2016 & \$ 10 & 100 \
\hline 2017 & 10 & 105 \
\hline 2018 & 12 & 110 \
\hline
\end{array}$
-Refer to Table 13-19.Looking at the table above,what is the approximate rate of growth of real average hourly earnings from 2016 to 2017?
A) 15%
B) 4.4%
C) -1.5%
D) -4.8%

Accepted Answer

The answer of Table 13-19
 \(\begin{array}{|c|c|c|}
\hline \text { Year }...

Question 7

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 8

Table 13-19
 $\begin{array}{|c|c|c|}
\hline \text { Year } & \begin{array}{c}
\text { Nominal Average Hourly } \
\text { Earnings }
\end{array} & \begin{array}{c}
\text { CPI } \
(\mathbf{1 9 8 2 - 1 9 8 4}=\mathbf{1 0 0})
\end{array} \
\hline 2016 & \$ 10 & 100 \
\hline 2017 & 10 & 105 \
\hline 2018 & 12 & 110 \
\hline
\end{array}$
-Refer to Table 13-19.Looking at the table above,what is the rate of growth of the average price level from 2016 to 2017?
A) 1%
B) 2%
C) 3%
D) 4%
E) 5%

Accepted Answer

The answer of Table 13-19
 \(\begin{array}{|c|c|c|}
\hline \text { Year }...

Question 9

Table 13-19
 $\begin{array}{|c|c|c|}
\hline \text { Year } & \begin{array}{c}
\text { Nominal Average Hourly } \
\text { Earnings }
\end{array} & \begin{array}{c}
\text { CPI } \
(\mathbf{1 9 8 2 - 1 9 8 4}=\mathbf{1 0 0})
\end{array} \
\hline 2016 & \$ 10 & 100 \
\hline 2017 & 10 & 105 \
\hline 2018 & 12 & 110 \
\hline
\end{array}$
-Refer to Table 13-19.Looking at the table above,what is the rate of growth of the average price level from 2017 to 2018?
A) 1%
B) 2%
C) 3.5%
D) 4.76%
E) 5.25%

Accepted Answer

The rate of growth of the average price level (CPI) from 2017 to 2018 is calculated as $(110 - 105) / 105 \times 100 = 4.76\%$.

Question 10

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 real interest rate is the nominal interest rate minus the inflation rate. In this case, the nominal interest rate is 10 percent and the expected real interest rate is 4 percent, so the expected inflation rate is 6 percent (10 percent - 4 percent = 6 percent).

If the inflation rate is greater than 6 percent, then the real interest rate would be lower than the expected 4 percent, meaning you would earn less on your loan than anticipated. On the other hand, if the inflation rate is lower than 6 percent or equal to 6 percent, the real interest rate would be higher than 4 percent, but lending money is riskier when inflation is higher, so it is not the most beneficial option.

Therefore, the option that would be most beneficial to you as the lender would be if the inflation rate is equal to 0 percent, which would result in a real interest rate of 10 percent - 0 percent = 10 percent, meaning you would earn the full expected return on your loan.

Question 11

Table 13-18
 $\begin{array}{|c|c|c|}
\hline \text { Year } & \begin{array}{c}
\text { Nominal Average Hourly } \
\text { Earnings }
\end{array} & \text { CPI } \
\hline 2016 & \$ 10 & 100 \
\hline 2017 & 10 & 105 \
\hline 2018 & 12 & 117 \
\hline
\end{array}$
-Refer to Table 13-18.Looking at the table above,what is the rate of growth of real average hourly earnings from 2017 to 2018?
A) 7.8%
B) 6.25%
C) 4%
D) -4%

Accepted Answer

The rate of growth of real average hourly earnings from 2017 to 2018 is calculated as follows:Real average hourly earnings in 2017 = Nominal average hourly earnings in 2017 / CPI in 2017 = 10 / 105 = 0.0952Real average hourly earnings in 2018 = Nominal average hourly earnings in 2018 / CPI in 2018 = 12 / 117 = 0.1026Rate of growth of real average hourly earnings from 2017 to 2018 = (Real average hourly earnings in 2018 - Real average hourly earnings in 2017) / Real average hourly earnings in 2017 = (0.1026 - 0.0952) / 0.0952 = 0.078 = 7.8%

Question 12

The nominal interest rate equals the real interest rate ________ the inflation rate.
A) times
B) divided by
C) plus
D) minus

Accepted Answer

The nominal interest rate includes inflation, while the real interest rate adjusts for inflation. To get from the nominal interest rate to the real interest rate, we must subtract the inflation rate. Therefore, the nominal interest rate equals the real interest rate plus the inflation rate.

Question 13

Table 13-20
 $\begin{array}{|c|c|c|}
\hline \text { Year } & \begin{array}{c}
\text { Median Salary: } \
\text { New York Yankees }
\end{array} & \begin{array}{c}
\text { CPI (1982-1984= } \
\mathbf{1 0 0})
\end{array} \
\hline 1989 & \$ 500,000 & 124 \
\hline 2015 & 3,300,000 & 238 \
\hline
\end{array}$ Salaries in major league baseball have soared over the last 30 to 40 years. Some of the salary increase is due to inflation. The table above reports the consumer price index and the median nominal salary of the New York Yankees for 1989 and 2015.
Source: USA Today Salaries Database, http://www.usatoday.com/sports/mlb/yankees/salaries/2015/team/all/
-Refer to Table 13-20.Calculate the real median salary of the New York Yankees in both 1982-1984 dollars and 2015 dollars.Calculate the percentage increase in the median salary of the Yankees from 1989 to 2015 in both nominal terms and in real terms.

Accepted Answer

The answer of Table 13-20
 \(\begin{array}{|c|c|c|}
\hline \text { Year }...

Question 14

Table 13-23
 $\begin{array}{|c|c|c|}
\hline \text { Year } & \begin{array}{c}
\text { Nominal } \
\text { Minimum } \
\text { Wage }
\end{array} & \begin{array}{c}
\text { CPI } \
(1982-1984=100)
\end{array} \
\hline 1974 & \$ 2.00 & 49.3 \
\hline 2017 & 7.25 & 244.3 \
\hline
\end{array}$
-Refer to Table 13-23.The table above lists the actual minimum wage and CPI in 1974 and in 2017.Using the above table,calculate the real minimum wage for 1974 and 2017.Calculate the rate of growth of the real minimum wage from 1974 to 2017.Are workers better off in terms of the purchasing power of a dollar in 1974 or 2017? Explain why.

Accepted Answer

The answer of Table 13-23
 \(\begin{array}{|c|c|c|}
\hline \text { Year }...

Question 15

Table 13-22
 $\begin{array}{|c|c|c|}
\hline \text { Year } & \begin{array}{c}
\text { Nominal Average Hourly } \
\text { Earnings }
\end{array} & \begin{array}{c}
\text { CPI } \
(\mathbf{1 9 8 2 - 1 9 8 4}=\mathbf{1 0 0})
\end{array} \
\hline 2016 & \$ 10 & 100 \
\hline 2017 & 11 & 105 \
\hline 2018 & 12 & 110 \
\hline
\end{array}$
-Refer to Table 13-22.Using the above table,calculate real average hourly earnings for 2016,2017,and 2018.Calculate the rate of growth of real average hourly earnings from 2017 to 2018.

Accepted Answer

The answer of Table 13-22
 \(\begin{array}{|c|c|c|}
\hline \text { Year }...

Question 16

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 17

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

To find the real interest rate, we need to adjust the nominal interest rate (in this case, 12%) for inflation. This can be done using the following formula:

Real Interest Rate = Nominal Interest Rate - Inflation Rate

Plugging in the numbers, we get:

Real Interest Rate = 12% - 4% = 8%

Therefore, the real interest rate you paid was 8%. The correct answer is C).

Question 18

To obtain real average hourly earnings,nominal average hourly earnings are multiplied by the CPI.

Accepted Answer

To obtain real average hourly earnings, nominal average hourly earnings are divided by the Consumer Price Index (CPI) and then usually multiplied by 100 to convert to an index. This adjusts for inflation and reflects the purchasing power of earnings.

Question 19

The CPI in 2010 was 218,while the CPI in 1980 was 82.If you had $5,000 in 1980,its equivalent purchasing power in 2010 would be $10,850.

Accepted Answer

To find the equivalent purchasing power, you use the formula: (CPI in 2010 / CPI in 1980) * 1980 dollar value. So, (218 / 82) * $5,000 = 2.65854 * $5,000 = $13,292.68, not $10,850.

Question 20

Currently,the base year for the CPI is the average of prices in the years 1982 to 1984.

Accepted Answer

This is correct according to the Bureau of Labor Statistics, which states that the base year for the CPI is indeed the average of prices in the years 1982 to 1984.

Quiz 13: Unemployment and Inflation

The real interest rate equals the nominal interest rate ________ the 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?

The stated interest rate on a loan is the

Nominal income is equal to real income if the CPI is less than 100.

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

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

The nominal interest rate equals the real interest rate ________ the 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

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?

To obtain real average hourly earnings,nominal average hourly earnings are multiplied by the CPI.

The CPI in 2010 was 218,while the CPI in 1980 was 82.If you had $5,000 in 1980,its equivalent purchasing power in 2010 would be $10,850.

Currently,the base year for the CPI is the average of prices in the years 1982 to 1984.