Question 1

If the nominal interest rate is 5 percent and there is a deflation rate of 3 percent, what is the real interest rate?

Accepted Answer

The answer of If the nominal interest rate is 5...

Question 2

Which of the following is correct?

Accepted Answer

The Continental Congress did indeed use the inflation tax to help finance the American Revolution. This involved printing more paper money, which then lost value due to inflation, effectively taxing those who held the currency.

Answer: C
 The inflation tax is a hidden tax that occurs due to the decrease in purchasing power of a currency as a result of inflation. It affects anyone who holds the currency, and there is no way to completely avoid it.

Answer: D
 Governments can raise revenues through means other than taxation, such as borrowing or selling assets. However, taxation is a primary source of revenue for most governments. The statement in option B is incorrect, as inflation is not a deliberate source of revenue for the U.S. government.

Question 3

The nominal interest rate is 3.5 percent and the inflation rate is 1.5 percent. What is the real interest rate?

Accepted Answer

Real interest rate = Nominal interest rate - Inflation rate 
= 3.5% - 1.5% 
= 2%

Question 4

Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?

Accepted Answer

Past experience suggests that hyperinflation is typically caused by a combination of high money supply growth, inflation acting like a tax on those who hold money, and the government printing money to finance its expenditures. Therefore, all of the choices are correct.

Question 5

In 2010 the U.S. government was running a large deficit. Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit. If the Fed were to buy government bonds to help the government finance its expenditures, then

Accepted Answer

If the Fed buys government bonds, it increases the money supply which leads to an increase in aggregate demand. This increase in demand for goods and services leads to an increase in the price level, so the value of money falls. Therefore, Choice C is the correct answer.

Question 6

When the money supply and the price level in countries that experienced hyperinflation are plotted on a graph against time, we see that

Accepted Answer

The answer of When the money supply and the price...

Question 7

The inflation tax refers to

Accepted Answer

The inflation tax refers to the revenue a government creates by printing more money, which can lead to increased inflation and decrease the value of existing currency. This can be an indirect way for a government to tax its citizens without explicitly raising taxes.

Question 8

Printing money to finance government expenditures

Accepted Answer

Printing money to finance government expenditures increases the money supply in the economy, which leads to inflation. Inflation reduces the purchasing power of money and imposes a hidden tax on those who hold money. Therefore, option B is the correct answer. Option A and D are incorrect as printing money causes the value of money to fall and prices to rise. Option C is also incorrect, as the U.S. government also borrows money by selling bonds to finance its expenditures.

Question 9

The nominal interest rate is 5 percent and the real interest rate is 3 percent. What is the inflation rate?

Accepted Answer

The inflation rate can be calculated by subtracting the real interest rate from the nominal interest rate. In this case, 5 percent - 3 percent = 2 percent inflation rate. Therefore, the correct answer is choice C.

Question 10

If the nominal interest rate is 4 percent and expected inflation is 2.5 percent, then what is the expected real interest rate?

Accepted Answer

The expected real interest rate can be found by subtracting the expected inflation rate from the nominal interest rate. 
Real interest rate = Nominal interest rate - Expected inflation rate 
Real interest rate = 4% - 2.5% 
Real interest rate = 1.5% 
Therefore, the expected real interest rate is 1.5%. Option D is the correct answer.

Question 11

The inflation tax falls mostly heavily on

Accepted Answer

The inflation tax falls mostly heavily on those who hold a lot of currency, as inflation reduces the purchasing power of their money. However, it only accounts for a small share of U.S. government revenue, as most government revenue comes from other sources such as taxes on income, sales, and property.

Question 12

The nominal interest rate is 6 percent and the real interest rate is 2.5 percent. What is the inflation rate?

Accepted Answer

The inflation rate can be calculated by subtracting the real interest rate from the nominal interest rate. 
Inflation rate = Nominal interest rate - Real interest rate 
= 6% - 2.5% = 3.5% 
Therefore, the inflation rate is 3.5 percent, which is option B.

Question 13

Governments may prefer an inflation tax to some other type of tax because the inflation tax

Accepted Answer

The answer of Governments may prefer an inflation tax to...

Question 14

The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate?

Accepted Answer

The answer of The nominal interest rate is 6 percent...

Question 15

The nominal interest rate is 5 percent and the inflation rate is 2 percent. What is the real interest rate?

Accepted Answer

Real interest rate = nominal interest rate - inflation rate 
= 5% - 2% 
= 3%

Question 16

The inflation tax

Accepted Answer

The answer of The inflation tax
...

Question 17

The source of hyperinflations is primarily

Accepted Answer

Hyperinflations are primarily caused by increases in money-supply growth that outpace the growth in the output of goods and services, leading to a loss of confidence in the currency and a rapid increase in prices. Lower output growth, declines in velocity, and increases in money demand may also contribute to inflation, but they are not the primary source of hyperinflation.

Question 18

Suppose the United States unexpectedly decided to pay off its debt by printing new money. Which of the following would happen?

Accepted Answer

If the United States were to pay off its debt by printing new money, it would increase the amount of money in circulation without a corresponding increase in the amount of goods and services available. This is essentially inflationary and would lead to a decrease in the purchasing power of each dollar. People who held money would feel poorer, as their money would be worth less. Prices would rise as well, as goods and services would become relatively more expensive in terms of the devalued currency. People who had lent money at a fixed interest rate would also feel poorer, as the real value of the amount they lent would decrease. Therefore, all three options are correct.

Question 19

If a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent, then

Accepted Answer

The nominal interest rate is 4 percent, but the inflation rate is also 3 percent. This means that the real interest rate, which is the nominal interest rate adjusted for inflation, is only 1 percent (4% - 3% = 1%). Therefore, choice B is the correct answer.

Question 20

The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the

Accepted Answer

The Fisher Effect states that increases in the growth rate of the money supply lead to proportional increases in nominal interest rates, but real interest rates remain unchanged. The effect is named after economist Irving Fisher.

Quiz 30: Money Growth and Inflation