Question 1

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 adjusts the nominal rate for inflation) becomes greater than the nominal interest rate because the nominal interest does not account for the increase in the purchasing power of money that deflation causes.

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
E)1.5 percent

Accepted Answer

The real interest rate can be calculated by subtracting the inflation rate from the nominal interest rate. In this case, the nominal interest rate is 10% (the $100 interest on a $1,000 loan), and the inflation rate is 7%. Therefore, the real interest rate is 10% - 7% = 3%.

Question 3

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

The calculation provided does not correctly adjust the $5,000 from 1981 to its 2014 equivalent using the Consumer Price Index (CPI) values given for 1991 and 2014. The correct calculation would involve finding the ratio of the CPI in 2014 to the CPI in 1991 (or the correct base year if 1981 CPI was intended) and then adjusting the $5,000 accordingly, which is not reflected in the number $3306.71 provided.

Question 4

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 5

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...

Question 6

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 the real interest rate is calculated as the nominal interest rate minus the inflation rate. If the inflation rate is greater than 7 percent, the real interest rate (12% - inflation rate) would be lower than the expected 5 percent, reducing the real cost of borrowing.

Question 7

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 known as the Fisher effect, which states that the nominal interest rate increases by the same amount as inflationary expectations, in order to maintain the same real interest rate.

Question 8

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

The real rate of interest is calculated as nominal rate of interest - inflation rate. Thus, real rate of interest = 6.5% - 3.0% = 3.5%. Therefore, the best choice is D.

Question 9

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

Question 10

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 (indicating inflation), the real interest rate will be lower than the nominal interest rate because the purchasing power of the interest earned is reduced.

Question 11

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

Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 0.55% - 1.5%
Real interest rate = -0.95%
Therefore, the real interest rate paid on savings is -0.95% or -1.05% (rounded to the nearest hundredth). Choice B is the closest option.

Question 12

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 quoted by the lender and does not take into account inflation or other factors that may affect the real rate of return.

Question 13

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 calculated by subtracting the inflation rate from the nominal interest rate. This is because the nominal interest rate includes both the real interest rate and the expected inflation rate, so subtracting the inflation rate from the nominal interest rate gives us the real interest rate.

Question 14

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 15

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 16

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. This can be expressed as:

Nominal interest rate = Real interest rate + Inflation rate

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

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 19

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 (nominal interest rate minus inflation rate) becomes higher than the nominal interest rate because the inflation rate is negative.

Question 20

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

The real interest rate is the nominal interest rate minus the expected inflation rate. So, in this case, if the expected real interest rate is 4 percent and the nominal interest rate is 10 percent, then the expected inflation rate is 6 percent. If the actual inflation rate turns out to be less than 6 percent, then the real interest rate would be higher than expected, which is beneficial for the lender. Therefore, the best choice is A) less than 6 percent.

Quiz 5: Unemployment and Inflation

When deflation occurs,

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 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.

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.

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 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

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

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

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?

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

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

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

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?

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

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

During a deflationary period,

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