Question 1

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
E)1.5 percent

Accepted Answer

To find the real interest rate, we need to adjust the nominal interest rate (in this case, 10%) for inflation. 
Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 10% - 7% 
Real interest rate = 3% 
Therefore, the real interest rate paid was 3%. So, the correct answer is option D

Question 2

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.
E)the real interest rate is positive while the nominal interest rate is negative.

Accepted Answer

Deflation implies a decrease in the general price level, which increases the real value of money. When deflation occurs, the real interest rate (which accounts for inflation) is greater than the nominal interest rate (which does not account for inflation), because the purchasing power of money increases.

Question 3

In 2016 the nominal interest rate paid by banks on savings deposits was 0.55 percent. At the same time the inflation rate was 1.5 percent. What was the real interest rate paid on savings?
A)-2.05 percent
B)-1.05 percent
C)0)55 percent
D)2.05 percent
E)3.10 percent

Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate. Therefore, the real interest rate paid on savings in 2016 was -1.5% + 0.55% = -0.95%, which is equivalent to -0.0095 in decimal form. Hence the best choice is B.

Question 4

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.
E)the past interest rate.

Accepted Answer

The stated interest rate on a loan is the nominal interest rate, which is the rate of interest before adjusting for inflation. It is the rate that is commonly advertised and quoted by lenders.

Question 5

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.
E)The nominal interest rate will be lower the real interest rate.

Accepted Answer

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

Question 6

The CPI in 2014 was 125.2, while the CPI in 1991 was 82.8.If you had $5,000 in 1981, its equivalent purchasing power in 2014 would be $3306.71.

Accepted Answer

There is an inconsistency in the question as it mentions the CPI in 1991 but then refers to 1981 in the answer. Without the correct CPI for 1981, it is not possible to calculate the equivalent purchasing power accurately.

Question 7

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.
E)equal to 3 percent.

Accepted Answer

The most beneficial rate of inflation for the borrower would be greater than 7 percent because it would reduce the real interest rate below the expected 5 percent, effectively decreasing the real cost of borrowing.

Question 8

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...

Question 9

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)less than 6 percent.
B)greater than 6 percent.
C)equal to 6 percent.
D)equal to 4 percent.

Accepted Answer

A lower inflation rate would be most beneficial to the lender because it would allow for a higher real interest rate (the nominal interest rate minus the inflation rate). If inflation is less than 6 percent, the real interest rate would be higher than 6 percent (10 percent minus inflation rate), which is greater than the expected real interest rate of 4 percent. This means the lender would earn a higher return on their investment than initially expected.

Question 10

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 if inflation is expected to increase, lenders would demand a higher nominal interest rate to compensate for the expected loss in purchasing power of the money they will be repaid in the future.

Question 11

Table 5.20 
-Refer to Table 5.20.The table above lists the actual minimum wage and CPI in 1981 and in 2015.Using the above table, calculate the real minimum wage for 1981 and 2015.Calculate the rate of growth of the real minimum wage from 1981 to 2015.Are workers better off in terms of the purchasing power of a dollar in 1981 or 2015? Explain why.

Accepted Answer

The answer of Table 5.20 
-Refer to Table 5.20.The table...

Question 12

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
E)$5,500; $6,000

Accepted Answer

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

Question 13

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 14

Table 5.19 
-Refer to Table 5.19.Using the above table, calculate real average hourly earnings for 2011, 2012, and 2013.Calculate the rate of growth of real average hourly earnings from 2012 to 2013.

Accepted Answer

The answer of Table 5.19 
-Refer to Table 5.19.Using the...

Question 15

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 16

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.
E)the nominal interest rate will be negative.

Accepted Answer

During a deflationary period, the price level decreases, which means the real interest rate (which adjusts the nominal rate for inflation) is higher than the nominal interest rate because the purchasing power of money increases.

Question 17

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 18

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

Accepted Answer

The real interest rate is the nominal interest rate adjusted for inflation. Therefore, the nominal interest rate needs to be reduced by the inflation rate, which gives us the real interest rate. This can be represented mathematically as the nominal interest rate minus the inflation rate, so the correct choice is D.

Question 19

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
E)3 percent

Accepted Answer

The nominal interest rate is 12% ($600/$5000). The real interest rate is the nominal rate minus the inflation rate: 12% - 4% = 8%.

Question 20

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

Accepted Answer

The nominal interest rate is the sum of the real interest rate and the inflation rate. Therefore, it is added (+) to the inflation rate to get the nominal interest rate.

Quiz 5: Unemployment and Inflation

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?

When deflation occurs,

In 2016 the nominal interest rate paid by banks on savings deposits was 0.55 percent. At the same time the inflation rate was 1.5 percent. What was the real interest rate paid on savings?

The stated interest rate on a loan is the

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

The CPI in 2014 was 125.2, while the CPI in 1991 was 82.8.If you had $5,000 in 1981, its equivalent purchasing power in 2014 would be $3306.71.

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

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?

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

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

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 .

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

Table 5.19 -Refer to Table 5.19.Using the above table, calculate real average hourly earnings for 2011, 2012, and 2013.Calculate the rate of growth of real average hourly earnings from 2012 to 2013.

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

During a deflationary period,

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

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

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?

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