Question 1

An inflation rate of over 500 percent per year would be classified as:

Accepted Answer

An inflation rate of over 500 percent per year would be classified as hyperinflation. Hyperinflation is an extreme form of inflation, where prices rise rapidly and uncontrollably, often resulting in a collapse of the economy and the currency.

Question 2

The "true" costs of inflation to an economy include all of the following EXCEPT:

Accepted Answer

Higher relative prices are not a direct cost of inflation; they are a result of changes in supply and demand. The true costs of inflation include shoe-leather costs, noise in the price system, and unexpected redistribution of wealth.

Question 3

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7% and inflation turns out to be 10% over the life of the loan, then the borrower ______ and the lender ______.

Accepted Answer

The answer of If a borrower and lender agree to...

Question 4

The "true" costs of inflation are:

Accepted Answer

Inflation can lead to reduced economic growth and efficiency, as it can create uncertainty and unpredictability in the economy, leading to reduced investment and spending. It also leads to higher costs of borrowing, which can discourage investment and reduce efficiency. Higher relative prices and a higher overall price level are also consequences of inflation, but they are not the "true" costs. Lower relative prices are not a consequence of inflation.

Question 5

If the nominal interest rate is 10% and the inflation rate is 3%, then the real interest rate equals:

Accepted Answer

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

Real interest rate = Nominal interest rate - Inflation rate

Real interest rate = 10% -3%

Real interest rate = 7%

Therefore, the correct answer is B) 7%.

Question 6

An extremely high rate of inflation is called _____.

Accepted Answer

Hyperinflation refers to an extremely high and rapid rate of inflation, often reaching triple digits within a short period of time.

Question 7

Inflation reduces economic efficiency because it does each of the following EXCEPT:

Accepted Answer

Inflation generally affects all prices proportionally, so it does not inherently change relative prices, which are the prices of goods in comparison to each other.

Question 8

The real interest rate is the:

Accepted Answer

The real interest rate is the annual percentage increase in the purchasing power of a financial asset. It reflects the actual increase in the value of an investment after accounting for inflation. The market interest rate (choice A) refers to the prevailing rate at which borrowers and lenders transact in the market. The annual percentage increase in the nominal value of a financial asset (choice B) refers to the rate of return on an investment before adjusting for inflation. The interest rate charged on a loan in dollar terms (choice D) is not relevant to the definition of real interest rate.

Question 9

It is difficult to engage in long-term financial planning when inflation is:

Accepted Answer

When inflation is high and erratic, it is difficult to predict future costs and returns, making long-term financial planning challenging. High inflation can also erode the value of savings and investments over time, further complicating long-term planning. Low and stable inflation, on the other hand, allows for more predictable planning and can be accounted for through indexing.

Question 10

The nominal interest rate is the:

Accepted Answer

Nominal interest rate is the annual percentage increase in the dollar value of a financial asset. It does not take into account the impact of inflation on the purchasing power of the currency received from an investment.

Question 11

As the rate of inflation increases, the increased cost to a consumer of more frequent trips to the bank to make cash withdrawals represents an increase in the:

Accepted Answer

The increased cost of frequent trips to the bank due to inflation is known as the "shoe leather costs" of inflation. This refers to the cost of time and effort spent by consumers in response to inflation, such as traveling to the bank more often to withdraw cash in smaller amounts to maintain purchasing power.

Question 12

The annual increase in the dollar value of a financial asset is called the:

Accepted Answer

The annual increase in the dollar value of a financial asset is referred to as the nominal interest rate. This rate does not take into account the effects of inflation or changes in purchasing power, unlike the real rate of return and real interest rate. The inflation rate reflects the rate at which the general level of prices for goods and services is increasing, and it is not directly related to the increase in the dollar value of a financial asset.

Question 13

If workers and employers agree to a three-year wage contract under the expectation of 3% inflation, and inflation turns out to be 5%, then:

Accepted Answer

The answer of If workers and employers agree to a...

Question 14

The real costs of inflation to society include:

Accepted Answer

If inflation is unanticipated, parties to long-term contracts are uncertain about the value of repaid dollars, so these contracts are sometimes not written. Note that income will only lose purchasing power if it is not adequately adjusted for inflation.

Question 15

Suppose a borrower and lender agree to an interest rate on a loan when inflation is expected to be 6%. The borrower would benefit the most if which of the following inflation rates actually occurred?

Accepted Answer

The answer of Suppose a borrower and lender agree to...

Question 16

Hyperinflation is:

Accepted Answer

Hyperinflation is defined as an extremely high rate of inflation, typically above 50% per month. It is not a common occurrence in most countries, including the United States.

Question 17

When inflation turns out to be different from what was expected, purchasing power is ______.

Accepted Answer

When unanticipated inflation occurs, an arbitrary redistribution of wealth or purchasing power occurs because some parties are helped and other parties are hurt by the inflation.

Question 18

If the real interest rate is 3% and the inflation rate is 7%, then the nominal interest rate equals:

Accepted Answer

The nominal interest rate is equal to the real interest rate plus the inflation rate. Therefore, nominal interest rate = real interest rate + inflation rate = 3% + 7% = 10%. So, the correct choice is D.

Question 19

Suppose workers and employers agree to a three-year wage contract under the expectation of 3% inflation, but inflation turns out to be 1%. In this case, ______ lost purchasing power, and ______ gained purchasing power.

Accepted Answer

The answer of Suppose workers and employers agree to a...

Question 20

Shoe leather costs include the ______ due to the more frequent trips to the bank, the new cash management systems and the expanded employment in banks that inflation causes.

Accepted Answer

Shoe leather costs refer to the costs incurred by individuals or businesses due to the increased transaction costs caused by inflation. These costs are often associated with more frequent trips to the bank, new cash management systems and expanded employment in banks, which requires time and effort. Therefore, options A, B, and C are not relevant in this context.

Quiz 5: Measuring Economic Activity: Gdp and Unemployment