Question 1

When actual inflation is less than expected inflation,

Accepted Answer

The answer of When actual inflation is less than expected...

Question 2

Suppose that in 2012,all prices in the economy double and that all wages and salaries have also doubled.In 2012 you

Accepted Answer

Since both prices and wages have doubled, the purchasing power of the salary remains the same. In other words, you can afford the same amount of goods and services as you could in 2011. Therefore, you are neither better off nor worse off.

Question 3

The stated interest rate on a loan is the

Accepted Answer

Nominal interest rate is the stated interest rate on a loan, before taking into account inflation or other factors that may affect the purchasing power of the money borrowed.

Question 4

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 5

When deflation occurs,

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 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

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 7

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?

Accepted Answer

The nominal interest rate is the 600/5000 = 0.12 or 12 percent. 
To find the real interest rate, we need to take into account inflation. 
Real interest rate = (1 + nominal interest rate) / (1 + inflation rate) - 1 
= (1 + 0.12) / (1 + 0.04) - 1 
= 0.08 or 8 percent.

Question 8

Suppose that at the beginning of a loan contract,the real interest rate is 4% and expected inflation is currently 6%.If actual inflation turns out to be 7% over the loan contract period,then

Accepted Answer

When actual inflation is higher than expected (7% instead of 6%), the real value of the money repaid is less than anticipated, benefiting borrowers by effectively reducing the real interest rate they pay.

Question 9

Which of the following describes a situation in which the person is hurt by inflation?

Accepted Answer

A person paid a fixed income during an inflationary period is hurt by inflation because their income does not increase with the rising cost of goods and services, causing them to have less purchasing power.

Question 10

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 ________.

Accepted Answer

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

Question 11

The cost to firms of changing prices

Accepted Answer

The cost to firms of changing prices is termed as a menu cost. The other options are incorrect as changing prices can be costly even with rapid inflation, and inflation being perfectly anticipated does not eliminate the cost of changing prices.

Question 12

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 13

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

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 14

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

Accepted Answer

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

Question 15

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?

Accepted Answer

Inflation rate should be subtracted from the nominal interest rate to get the real interest rate.
Real interest rate = Nominal interest rate - Inflation rate
Real interest rate = 10% - 7% (inflation rate)
Real interest rate = 3%

Question 16

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

Accepted Answer

Real rate of interest = Nominal rate of interest - Inflation rate
= 6.5% - 3.0%
= 3.5%

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

Which of the following is not an example of inflation causing a redistribution of income because the inflation was unanticipated?

Accepted Answer

Option C is not an example of inflation causing a redistribution of income because it does not involve any change in income or wealth distribution. It is simply an additional cost for the firm that arises from having to change prices more frequently due to inflation. Options A, B, and D involve a redistribution of income or wealth because they result in some parties gaining or losing from the unanticipated inflation.

Question 19

If inflation is positive and is perfectly anticipated,

Accepted Answer

When inflation is positive and is perfectly anticipated, the value of paper money decreases. Those who hold paper money lose purchasing power as the value of their money decreases. Those who borrow money actually benefit as they will pay back their loans with less valuable dollars. Those who lend money lose purchasing power as the value of their loaned money decreases. Therefore, those that hold paper money lose.

Question 20

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 inflationary expectations would lead investors and lenders to demand a higher nominal interest rate in order to compensate for the loss of purchasing power caused by inflation.

Quiz 20: Unemployment and Inflation