Question 1

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 2

Which of the following is not an example of inflation causing a redistribution of income because the inflation was unanticipated?
A)A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation per year,and the actual rate of inflation ends up being 7 percent per year.
B)A worker receives a raise in salary that is less than the rate of inflation,because management under-predicted inflation.
C)Firms have to hire an extra worker to change prices in its store because of inflation.
D)A bank collects a lower amount of interest from a loan because inflation was under-predicted.

Accepted Answer

Hiring an extra worker to change prices in a store is not an example of inflation causing a redistribution of income, whether it was anticipated or unanticipated. It is simply a cost of doing business in an inflationary environment. The other options are examples of inflation causing a redistribution of income because they involve one party (such as a firm or a worker) losing out due to unanticipated inflation, while another party gains (such as a union or a borrower).

Question 3

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 4

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
A)borrowers gain 1% of the loan value.
B)lenders gain 1% of the loan value.
C)borrowers lose 3% of the loan value.
D)lenders gain 3% of the loan value.

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 5

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 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
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 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

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 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

Which of the following describes a situation in which the person is hurt by inflation?
A)a retiree whose pension is adjusted for inflation
B)a person who borrows money during a period when inflation is under-predicted
C)a person who lends money during a period when inflation is over-predicted
D)a person paid a fixed income during an inflationary period

Accepted Answer

A person paid a fixed income during an inflationary period will see the purchasing power of their income decrease as prices rise. This means they will be able to afford fewer goods and services, causing them to be hurt by inflation.

Question 11

The stated interest rate on a loan is the
A)real interest rate.
B)nominal interest rate.
C)actual inflation rate.
D)expected inflation rate.

Accepted Answer

The nominal interest rate is the stated interest rate on a loan or investment, without taking into account inflation. The real interest rate takes inflation into account, and is calculated by subtracting the inflation rate from the nominal interest rate. The actual and expected inflation rates are not the same as the stated interest rate.

Question 12

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?
A)17 percent
B)10 percent
C)7 percent
D)3 percent

Accepted Answer

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

Nominal interest rate = $100/$1000 = 0.1 or 10%
Inflation rate = 7%

Real interest rate = nominal interest rate - inflation rate = 10% - 7% = 3%

Question 13

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?
A)16 percent
B)12 percent
C)8 percent
D)6 percent

Accepted Answer

To find the real interest rate, we need to adjust the nominal interest rate for inflation. We can use the formula: 
Real interest rate = nominal interest rate - inflation rate

In this case, the nominal interest rate is $600/$5,000 = 0.12 or 12%. The inflation rate is 4%. 
Real interest rate = 12% - 4% = 8%, so the answer is (C) 8 percent.

Question 14

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 15

If inflation is positive and is perfectly anticipated,
A)those that borrow money lose.
B)those that lend money lose.
C)those that hold paper money lose.
D)no one in the economy loses.

Accepted Answer

Those who hold paper money lose as the value of their money decreases with inflation. However, borrowing and lending are unaffected in a perfectly anticipated inflation since the interest rate would adjust to match the inflation rate. Therefore, there are no winners or losers in the economy as a whole.

Question 16

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 would demand a higher nominal interest rate to compensate for the expected loss in purchasing power due to rising inflation.

Question 17

When actual inflation is less than expected inflation,
A)borrowers lose and lenders gain.
B)borrowers gain and lenders lose.
C)borrowers and lenders both gain.
D)borrowers and lenders both lose.

Accepted Answer

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

Question 18

Suppose that in 2012,all prices in the economy double and that all wages and salaries have also doubled.In 2012 you
A)are worse off than you were in 2011 as you can no longer afford to buy as many goods and services.
B)are better off than you were in 2011 as your salary is higher than it was in 2011 and you can now buy more goods and services.
C)are no better off or worse off than you were in 2011 as the purchasing power of your salary has remained the same.
D)cannot determine whether you are better off or worse off than you were in 2011,because the purchasing power of your salary cannot be determined.

Accepted Answer

Since both prices and wages have doubled, the ratio of prices to wages has remained constant. Therefore, the purchasing power of your salary has remained the same, and you are neither better off nor worse off than you were in 2011.

Question 19

The cost to firms of changing prices
A)is small even when there is rapid inflation.
B)is called a menu cost.
C)does not exist if inflation is perfectly anticipated.
D)all of the above

Accepted Answer

The cost to firms of changing prices is called a menu cost. Option A is incorrect as the cost is not small even when there is rapid inflation. Option C is also incorrect as the cost still exists even if inflation is perfectly anticipated.

Question 20

If the nominal rate of interest is 6.5% and the inflation rate is 3.0%,what is the real rate of interest?
A)-9.5%
B)-3.5%
C)1.5%
D)3.5%
E)9.5%

Accepted Answer

The real rate of interest is calculated by subtracting the inflation rate from the nominal rate of interest.

Real rate of interest = Nominal rate of interest - Inflation rate

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

Therefore, the real rate of interest is 3.5%. Option D is the correct answer.

Quiz 13: Unemployment and Inflation

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

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

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

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

Real interest rates at times have been negative.Why would anyone lending money agree to a negative real interest rate?

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

When deflation occurs,

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?

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 .

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

The stated interest rate on a loan is the

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?

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?

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

If inflation is positive and is perfectly anticipated,

If inflationary expectations are increasing,we would expect that the nominal interest rate would also be increasing,holding all else constant.

When actual inflation is less than expected inflation,

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

The cost to firms of changing prices

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