Question 1

Does an increase in the inflation rate increase or decrease the amount of money people choose to hold at any given price level? What would an increase in the inflation rate do to money demand? What would this change in money demand do to the price level?

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The answer of Does an increase in the inflation rate...

Question 2

If the inflation rate was 8%, and the tax rate was 20%, and you deposited money in a bank account that pays 12%, what is your after tax real interest rate? Show you work.

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The answer of If the inflation rate was 8%, and...

Question 3

The idea that firms incur actual costs when they change prices is known as _____. Firms in countries with lower inflation rates will change price _____ frequently compared to those countries where inflation is higher.

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The answer of The idea that firms incur actual costs...

Question 4

Jackie saves $100 and receives $106 the next year. During the same year, the price of the basket of goods that she purchases increases from $100 to $104. What is nominal interest rate on Jackie's saving? What is the real interest rate on Jackie's saving? What was the inflation rate?

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The answer of Jackie saves $100 and receives $106 the...

Question 5

In the U.S., taxes are paid on one's _____ gains/returns. Therefore, a _____ inflation rate encourages more saving.

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The answer of In the U.S., taxes are paid on...

Question 6

Mitch makes payments on a car loan. If the price level a year ago was 120 and people expected it to rise to 125 but it actually rose to 128, what happened to the real value of Mitch's payment as opposed to what he was expecting to happen? Express your answer to the nearest 100th.

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The answer of Mitch makes payments on a car loan....

Question 7

Given that firms change their prices infrequently, a business that has just raised its price will have a __________ relative price; over time as its price remains fixed its relative price __________.

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The answer of Given that firms change their prices infrequently,...

Question 8

One benefit of low inflation is that it _____ the variability of relative price changes. Therefore, resources are _____ likely to be better allocated.

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The answer of One benefit of low inflation is that...

Question 9

You earn a nominal return of 6% on your savings and the tax rate is 20%. If the rate of inflation is 2%, what are the before-tax real interest rate and your after-tax rate of return?

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The answer of You earn a nominal return of 6%...

Question 10

In the early 1920s U.S. consumer prices fell, while Germany experienced hyperinflation. According to the ideas of shoeleather costs and menu costs, U.S. households (relative to German households) made _____ frequent trips to the bank and U.S. firms changed prices _____ frequently.

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The answer of In the early 1920s U.S. consumer prices...

Question 11

The inflation tax alters people's behavior and creates a deadweight loss. Explain.

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Question 12

Your grandfather tells you that his annual income increased at an average rate of eight percent over his lifetime. He complains, however, that the average inflation rate of three percent reduced his ability to buy all the things he could have purchased if inflation had been zero. You respectfully tell your grandfather that he is committing the _____, because his annual income would have increased at an average rate of only five percent if inflation had been zero.

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The answer of Your grandfather tells you that his annual...

Question 13

During hyperinflations, people desire to hold less money and will go to the bank more frequently. This waste of resources due to the high rate of inflation is known as .

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The answer of During hyperinflations, people desire to hold less...

Question 14

If inflation is less than expected, who is wealth redistributed to?

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The answer of If inflation is less than expected, who...

Question 15

Fifteen years ago your parents purchased some land with the idea of selling it later to help pay your college expenses. They purchased the land for $100,000. They sold it for $180,000. During the time they held it the price level rose from 80 to 120. If your parents face a 25% tax rate, what was their real after­tax gain? (Hint: What's the real value of the land in current prices?)

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The answer of Fifteen years ago your parents purchased some...

Question 16

If the inflation rate was 10%, and the tax rate was 25%, and you deposited money in a bank account that paid 14%, what is after tax real interest rate? Show you work.

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The answer of If the inflation rate was 10%, and...

Question 17

One year ago Sam purchased bonds for $100,000. He just sold them for $120,000. During the year the price level rose by 5%. If the tax rate on capital gains is 20%, how much did Sam gain in real terms?

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The answer of One year ago Sam purchased bonds for...

Question 18

Some countries have experienced an extraordinarily high rate of inflation known as . This is usually due to governments using money creation as a way to pay for their spending. The revenue the government raises by creating money is called the .

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The answer of Some countries have experienced an extraordinarily high...

Question 19

The costs a business incurs to change its prices are called .

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The answer of The costs a business incurs to change...

Question 20

What are menu costs and why does high inflation increase menu costs?

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The answer of What are menu costs and why does...

Quiz 30: Money Growth and Inflation