Question 1

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 answer of Suppose you lend $1,000 at an interest...

Question 2

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.The CPI over that year rises from 180 to 200.What is the real interest rate you are paying?
A)15%
B)5%
C)-1.1%
D)-6.1%

Accepted Answer

To calculate the real interest rate, we need to use the formula: 
real interest rate = nominal interest rate - inflation rate

The inflation rate can be calculated using the CPI formula: 
inflation rate = (ending CPI - beginning CPI) / beginning CPI

Plugging in the values: 
inflation rate = (200-180) / 180 = 0.1111 or 11.11%

Now we can calculate the real interest rate: 
real interest rate = 5% - 11.11% = -6.11%

So, the answer is D, which means you are actually losing 6.11% of the value of your loan due to inflation.

Question 3

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.

Accepted Answer

During a deflationary period, the price level decreases, which increases the purchasing power of money. This means that the real interest rate (which accounts for inflation) is higher than the nominal interest rate (which does not account for inflation), as the real value of money lent or saved increases more than expected due to falling prices.

Question 4

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 5

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 6

If inflation is higher than expected,this helps borrowers (by reducing the real interest rate they pay)and hurts lenders (by reducing the real interest rate they receive).

Accepted Answer

This is because inflation reduces the purchasing power of the nominal interest rate, making it lower in real terms. This benefits borrowers who are paying interest on loans, as they are repaying their debt with money that is worth less. On the other hand, lenders who receive interest payments are receiving payments that are worth less in real terms.

Question 7

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.

Accepted Answer

Deflation implies a decrease in the general price level, which increases the real value of money. Therefore, the real interest rate (which accounts for inflation) becomes greater than the nominal interest rate (which does not account for inflation) during deflation.

Question 8

The nominal interest rate will be less than the real interest rate when
A)the rate of inflation is positive but decreasing.
B)the rate of inflation is positive and increasing.
C)the rate of inflation is negative.
D)the real interest rate is negative.

Accepted Answer

The nominal interest rate will be less than the real interest rate when the rate of inflation is negative. This is because the real interest rate is adjusted for inflation, so if inflation is negative (deflation), the real interest rate would be higher than the nominal rate.

Question 9

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

Accepted Answer

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

Question 10

Deflation occurs when
A)there is a sustained increase in the price level.
B)there is a one-time increase in the price level.
C)there is a decline in the price level.
D)there is a decrease in the expected rate of inflation.

Accepted Answer

Deflation occurs when there is a sustained decrease in the price level. This means that the general level of prices for goods and services is decreasing over time instead of increasing or staying the same. This can be caused by a variety of factors, including a decrease in demand, an increase in productivity, or a decrease in the money supply.

Question 11

The real rate of interest is
A)the nominal interest rate plus the inflation rate.
B)the nominal interest rate minus the inflation rate.
C)the interest rate determined by the supply and demand in the money market.
D)the nominal interest rate.

Accepted Answer

The real rate of interest is the nominal interest rate minus the inflation rate. This is because the nominal interest rate includes inflation, and the real rate of interest is a measure of the true increase in purchasing power that comes from investing. Subtracting the inflation rate from the nominal interest rate gives the real rate of interest.

Question 12

If the nominal interest rate is 6% and the inflation rate is 2% then the real interest rate is
A)8%.
B)4%.
C)3%.
D)2%.
E)1%.

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. 
Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 6% - 2% = 4%

Question 13

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 lenders and investors will demand a higher return to compensate for the anticipated decrease in purchasing power of money due to inflation. As a result, the nominal interest rate will need to increase to provide the higher return.

Question 14

You lend $5,000 to a friend for one year at a nominal interest rate of 10%.The CPI over that year rises from 180 to 190.What is the real rate of interest you will earn?
A)0%
B)4.4%
C)5.5%
D)5.8%

Accepted Answer

To find the real rate of interest, we need to adjust for inflation.

Real interest rate = (1 + nominal interest rate)/(1 + inflation rate) -1

In this case, nominal interest rate = 10% and inflation rate = (190-180)/180 = 5.56%

Real interest rate = (1 + 0.1)/(1 + 0.0556) -1 = 4.38%

Therefore, the real rate of interest you will earn is 4.4%, which is answer choice B.

Question 15

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.If inflation over the year is 2%,what is the real interest rate you are paying?
A)2%
B)2.5%
C)3%
D)5%

Accepted Answer

The real interest rate can be calculated using the formula: real interest rate = nominal interest rate - inflation rate. Therefore, the real interest rate is 5% - 2% = 3%.

Question 16

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

Accepted Answer

This is known as the Fisher equation and is widely used in economics to calculate the real interest rate.

Question 17

If you want to earn a real interest rate of 3% on money you lend,and you expect that inflation will be 2%,what nominal rate of interest will you charge?
A)1%
B)5%
C)6%
D)9%

Accepted Answer

To find the nominal interest rate when you want a real interest rate of 3% and expect inflation to be 2%, you use the formula: nominal interest rate = real interest rate + inflation rate. Therefore, 3% + 2% = 5%.

Question 18

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.

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, which does not account for inflation.

Question 19

If the nominal interest rate is 6% and the inflation rate is 9%,then the real interest rate is
A)-3%.
B)3%.
C)6.67%.
D)15%.

Accepted Answer

Real interest rate = nominal interest rate - inflation rate
Real interest rate = 6% - 9%
Real interest rate = -3% (negative because inflation is higher than the nominal interest rate)

Question 20

You agree to lend $1,000 for one year at a nominal interest rate of 10%.You anticipate that inflation will be 4% over that year.If inflation is instead 3% over that year,which of the following is true?
A)The real interest rate you earn on your money is lower than you expected.
B)The purchasing power of the money that will be repaid to you will be lower than you expected.
C)The person who borrowed the $1,000 will be worse off as a result of the unanticipated decrease in inflation.
D)The real interest rate you earn on your money will be negative.

Accepted Answer

The real interest rate is calculated as the nominal interest rate minus the inflation rate. If inflation decreases from the expected 4% to 3%, the real interest rate increases, making the lender better off (earning more in real terms) and the borrower worse off, as they are paying back money that is worth more in terms of purchasing power.

Quiz 9: Unemployment and Inflation

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

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.The CPI over that year rises from 180 to 200.What is the real interest rate you are paying?

During a deflationary period,

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

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

If inflation is higher than expected,this helps borrowers (by reducing the real interest rate they pay)and hurts lenders (by reducing the real interest rate they receive).

When deflation occurs,

The nominal interest rate will be less than the real interest rate when

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 .

Deflation occurs when

The real rate of interest is

If the nominal interest rate is 6% and the inflation rate is 2% then the real interest rate is

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%.The CPI over that year rises from 180 to 190.What is the real rate of interest you will earn?

You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.If inflation over the year is 2%,what is the real interest rate you are paying?

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

If you want to earn a real interest rate of 3% on money you lend,and you expect that inflation will be 2%,what nominal rate of interest will you charge?

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

If the nominal interest rate is 6% and the inflation rate is 9%,then the real interest rate is

You agree to lend $1,000 for one year at a nominal interest rate of 10%.You anticipate that inflation will be 4% over that year.If inflation is instead 3% over that year,which of the following is true?