Question 1

If inflation increases unexpectedly, then
A)borrowers pay a higher real interest rate than they expected.
B)lenders receive a lower real interest rate than they expected.
C)lenders gain and borrowers gain.
D)neither borrowers nor lenders lose.
E)borrowers gain from a higher than expected real interest rate.

Accepted Answer

When inflation increases unexpectedly, the real value of money decreases, meaning the amount paid back by borrowers has less purchasing power than anticipated. This results in lenders receiving a lower real interest rate than they expected, as the money they get back buys less than planned.

Question 2

The problem with inflation is that as prices rise, consumers can no longer afford to buy as many goods and services.

Accepted Answer

The answer of The problem with inflation is that as...

Question 3

The costs to firms of changing prices are called menu costs.

Accepted Answer

Menu costs refer to the costs that firms incur when changing their prices, such as the costs of printing new menus or updating computer systems.

Question 4

When the actual inflation rate turns out to be greater than the expected inflation rate, who gains - the borrower or the lender - and who loses? Explain why.

Accepted Answer

The answer of When the actual inflation rate turns out...

Question 5

Explain whether you agree or disagree with the following statement: "The reason that inflation is bad is because it increases the cost of living - the costs of goods and services we buy - without increasing income in general."

Accepted Answer

The answer of Explain whether you agree or disagree with...

Question 6

Explain why you would rather be a borrower during a period of unexpected rising inflation, and a lender during a period of unexpected declining inflation.

Accepted Answer

The answer of Explain why you would rather be a...

Question 7

Which of the following do not suffer the costs of inflation?
A)persons on fixed incomes
B)persons whose incomes rise more rapidly than inflation
C)firms that have to devote more time and labour to raising prices
D)investors who have to pay higher taxes because of the inflation
E)lenders who did not forecast inflation accurately

Accepted Answer

Persons whose incomes rise more rapidly than inflation will not suffer the costs of inflation because their purchasing power will increase.

Question 8

If inflation is anticipated, some effects of inflation on the redistribution of income can be avoided.

Accepted Answer

If inflation is anticipated, individuals and businesses can adjust their behavior in anticipation of it, such as adjusting prices and wages accordingly. This can avoid some of the negative effects of inflation on the redistribution of income.

Question 9

Describe how a lender can lose during inflation if the inflation is unanticipated and the loan is a fixed-interest-rate loan.How would a variable-interest-rate loan (one that adjusts over the contract period)eliminate these losses?

Accepted Answer

The answer of Describe how a lender can lose during...

Question 10

If inflation is completely anticipated,
A)no one loses in the economy.
B)borrowers lose in the economy.
C)lenders lose in the economy.
D)firms lose because they incur menu costs.
E)income cannot be redistributed.

Accepted Answer

When inflation is completely anticipated, firms may still incur menu costs, which are the costs associated with changing prices (such as reprinting menus, catalogs, or price lists). This does not mean that no one loses, but rather that this specific cost can affect firms.

Question 11

Inflation that is ________ than what is expected benefits ________ and hurts ________.
A)less; lenders; borrowers
B)less; borrowers; lenders
C)greater; lenders; borrowers
D)greater; lenders; no one
E)less; no one; borrowers

Accepted Answer

When inflation is less than expected, the real value of money repaid is higher than anticipated, benefiting lenders who receive more valuable money and hurting borrowers who pay back with more valuable money.

Question 12

The costs to firms of changing prices are called
A)redistribution costs.
B)menu costs.
C)anticipation costs.
D)money illusion costs.
E)an inflation tax.

Accepted Answer

The costs to firms of changing prices are called menu costs. It refers to the costs that firms incur in changing prices, such as printing new menus or updating price tags.

Question 13

Which of the following is not a cost posed by inflation?
A)Inflation reduces the affordability of goods and services to the average consumer.
B)The money that consumers and firms hold loses its purchasing power.
C)Firms must pay for changing prices on products and printing new catalogues.
D)Banks can lose if they under predict inflation and charge an interest rate that does not completely compensate for inflation.
E)Firms must hire experts to predict inflation more accurately.

Accepted Answer

Inflation primarily affects the economy by reducing the purchasing power of money, leading to higher costs for changing prices, and necessitating predictions about future inflation. However, it does not directly reduce the affordability of goods and services to the average consumer; rather, it affects how much goods and services can be bought with a given amount of money.

Question 14

Which of the following individuals would be most negatively affected by anticipated inflation?
A)a retired railroad engineer who receives a fixed income payment every month
B)a union contractor whose pay is adjusted based on changes in the CPI
C)a full-time employee at a pizza parlour who makes more than the minimum wage
D)a student who borrows $10,000 at a nominal interest rate of 5% to finance educational expenses
E)a financial manager who gets paid a percentage of the money they manage

Accepted Answer

A retired railroad engineer who receives a fixed income payment every month would be most negatively affected by anticipated inflation because the purchasing power of their fixed income would decrease as prices increase.

Answer: D 
 The student who borrows $10,000 at a nominal interest rate of 5% to finance educational expenses would also be negatively affected by anticipated inflation because inflation would decrease the value of the money borrowed, but they would still have to pay back the loan amount plus interest at a fixed rate.

Question 15

There are no costs to inflation if it is fully anticipated.

Accepted Answer

Even if inflation is fully anticipated, there are still costs such as menu costs (the costs of changing prices), shoe leather costs (the costs associated with more frequent transactions or withdrawals of money), and the distortion of tax systems which do not fully adjust for inflation, leading to inefficiencies and potential reductions in savings and investment.

Question 16

Inflation redistributes income to a greater extent when the inflation is unanticipated compared to when the inflation is anticipated.

Accepted Answer

When inflation is unanticipated, individuals and firms may not have adjusted their behaviors and expectations to the higher price level, causing some to lose out and others to benefit from the inflation. For example, those on fixed incomes or with fixed wages may face a decline in real income, while those who own physical assets may see an increase in their nominal value. In contrast, when inflation is anticipated, individuals and firms may adjust their behaviors and expectations to mitigate the effects of inflation, resulting in less income redistribution.

Question 17

If inflation is higher than anticipated which of the following is most likely to be true
A)it will be easier to repay your student loans.
B)it will be easier to get a new mortgage.
C)income will be more even distributed than before.
D)forecasting the future inflation rate will become easier.
E)the money in your piggy bank will increase in value.

Accepted Answer

When inflation is higher than anticipated, the real value of fixed-rate debt like student loans decreases, making it easier to repay them with money that is worth less.

Question 18

What are menu costs?
A)the full list of a firm's costs of production
B)the costs to a firm of changing prices
C)the cost to a household of borrowing money when there is deflation
D)the opportunity cost of dining in a restaurant instead of at home
E)the cost of borrowing money to start a restaurant

Accepted Answer

Menu costs refer to the costs that a firm incurs when it changes its prices. These costs include printing new menus, changing price tags, updating computer systems, and communicating the new prices to customers. Option A is incorrect because it refers to the full list of a firm's costs of production, which includes many other costs besides menu costs. Option C is incorrect because it refers to the cost to a household of borrowing money during deflation, which is not related to menu costs. Option D is incorrect because it refers to the opportunity cost of dining in a restaurant instead of at home, which is not related to menu costs. Option E is incorrect because it refers to the cost of borrowing money to start a restaurant, which is not related to menu costs.

Question 19

Describe how inflation can be costly even if it is anticipated.

Accepted Answer

The answer of Describe how inflation can be costly even...

Question 20

If inflation is unanticipated, no redistribution of income can occur.

Accepted Answer

Unanticipated inflation can lead to a redistribution of income. When inflation occurs unexpectedly, some individuals and groups may benefit while others may be hurt. For example, if wages do not keep up with inflation, then workers may experience a decline in their real income. On the other hand, individuals who hold debt may benefit from inflation, as the real value of their debt decreases. Therefore, unanticipated inflation can lead to a redistribution of income.

Quiz 5: Unemployment and Inflation

If inflation increases unexpectedly, then

The problem with inflation is that as prices rise, consumers can no longer afford to buy as many goods and services.

The costs to firms of changing prices are called menu costs.

When the actual inflation rate turns out to be greater than the expected inflation rate, who gains - the borrower or the lender - and who loses? Explain why.

Explain whether you agree or disagree with the following statement: "The reason that inflation is bad is because it increases the cost of living - the costs of goods and services we buy - without increasing income in general."

Explain why you would rather be a borrower during a period of unexpected rising inflation, and a lender during a period of unexpected declining inflation.

Which of the following do not suffer the costs of inflation?

If inflation is anticipated, some effects of inflation on the redistribution of income can be avoided.

Describe how a lender can lose during inflation if the inflation is unanticipated and the loan is a fixed-interest-rate loan.How would a variable-interest-rate loan (one that adjusts over the contract period)eliminate these losses?

If inflation is completely anticipated,

Inflation that is than what is expected benefits and hurts .

The costs to firms of changing prices are called

Which of the following is not a cost posed by inflation?

Which of the following individuals would be most negatively affected by anticipated inflation?

There are no costs to inflation if it is fully anticipated.

Inflation redistributes income to a greater extent when the inflation is unanticipated compared to when the inflation is anticipated.

If inflation is higher than anticipated which of the following is most likely to be true

What are menu costs?

Describe how inflation can be costly even if it is anticipated.

If inflation is unanticipated, no redistribution of income can occur.