Question 1

Suppose a borrower and lender agree to an interest rate on a loan when inflation is expected to be 6%.The borrower would benefit the most if which of the following inflation rates actually occurred?
A)0%
B)3%
C)6%
D)9%

Accepted Answer

If the actual inflation rate is higher than expected (9% instead of 6%), the real interest rate paid by the borrower is lower, benefiting the borrower.

Question 2

The annual increase in the dollar value of a financial asset is called the:
A)real rate of return.
B)inflation rate.
C)real interest rate.
D)nominal interest rate.

Accepted Answer

The annual increase in the dollar value of a financial asset is referred to as the nominal interest rate, as it is not adjusted for inflation. The real rate of return takes inflation into account, while the inflation rate and real interest rate are separate concepts.

Question 3

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7% and inflation turns out to be 10% over the life of the loan, then the borrower ______ and the lender ______.
A)gains; gains
B)gains; loses
C)is not affected; gains
D)loses; gains

Accepted Answer

The borrower gains because they repay the loan with money that is worth less than expected due to higher inflation, while the lender loses because they receive payments that have less purchasing power than anticipated.

Question 4

The nominal interest rate is the:
A)annual percentage increase in the dollar value of a financial asset.
B)annual percentage increase in the purchasing power of a financial asset.
C)real rate of return on an asset.
D)the real interest rate minus the inflation rate.

Accepted Answer

The nominal interest rate refers to the annual percentage increase in the dollar value of a financial asset. It does not take into account the effect of inflation, unlike the real interest rate which adjusts for inflation.

Question 5

The "true" costs of inflation to an economy include all of the following except:
A)shoe-leather costs.
B)higher relative prices.
C)noise in the price system.
D)unexpected redistribution of wealth.

Accepted Answer

Higher relative prices indicate that a particular good or service has become more scares compared to others. This phenomenon is not necessarily related to inflation.

Question 6

Hyperinflation is:
A)frequently experienced in the United States.
B)very erratic inflation.
C)an extremely high rate of inflation.
D)an extremely low rate of inflation.Hyperinflation is an extremely high rate of inflation.

Accepted Answer

Hyperinflation refers to an extremely high and typically accelerating rate of inflation, often exceeding 50% per month, leading to a rapid erosion of the real value of the local currency.

Question 7

The real costs of inflation to society include:
A)an increase in the general level of prices.
B)lost purchasing power of income.
C)higher relative prices.
D)interference with long-term planning.

Accepted Answer

If inflation is unanticipated, parties to long-term contracts are uncertain about the value of repaid dollars, so these contracts are sometimes not written. Note that income will only lose purchasing power if it is not adequately adjusted for inflation.

Question 8

If the nominal interest rate is 8% and the real interest rate is 3%, then the inflation rate equals:
A)3%
B)5%
C)8%
D)11%

Accepted Answer

The inflation rate can be calculated using the formula: nominal interest rate = real interest rate + inflation rate. Therefore, 8% = 3% + inflation rate, which means the inflation rate is 5%.

Question 9

If the nominal interest rate is 10% and the inflation rate is 3%, then the real interest rate equals:
A)3%
B)7%
C)10%
D)13%

Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate. So, 10% - 3% = 7%.

Question 10

If the real interest rate is 3% and the inflation rate is 7%, then the nominal interest rate equals:
A)3%.
B)4%.
C)7%.
D)10%

Accepted Answer

The nominal interest rate is the sum of the real interest rate and the inflation rate. Therefore, 3% (real interest rate) + 7% (inflation rate) = 10% (nominal interest rate).

Question 11

Suppose workers and employers agree to a three-year wage contract under the expectation of 3% inflation, but inflation turns out to be 1%.In this case, ______ lost purchasing power, and ______ gained purchasing power.
A)employers; workers
B)no one; employers
C)workers; employers
D)employers; no one

Accepted Answer

The answer of Suppose workers and employers agree to a...

Question 12

An inflation rate of over 500 percent per year would be classified as:
A)relative inflation.
B)deflation.
C)inflation.
D)hyperinflation.

Accepted Answer

An inflation rate of over 500 percent per year is considered hyperinflation, which occurs when there is an extremely rapid increase in the general price level of goods and services in an economy. This type of inflation can cause severe economic instability, such as a breakdown in currency and a decrease in economic output.

Question 13

The real interest rate equals the:
A)nominal interest rate plus the inflation rate.
B)nominal interest rate minus the inflation rate.
C)inflation rate minus the nominal interest rate.
D)inflation rate times the nominal interest rate.

Accepted Answer

The real interest rate is the nominal interest rate adjusted for inflation. Therefore, it is calculated by subtracting the inflation rate from the nominal interest rate. The formula for real interest rate is: Real interest rate = nominal interest rate - inflation rate.

Question 14

The nominal interest rate equals the:
A)real interest rate minus the inflation rate.
B)real interest rate plus the inflation rate.
C)real interest rate divided by the inflation rate.
D)inflation rate minus the real interest rate.

Accepted Answer

The nominal interest rate is the rate of return on a loan or investment without adjusting for inflation. Therefore, it includes both the real interest rate and the expected inflation rate, since lenders and borrowers consider both factors when determining the interest rate. Thus, nominal interest rate equals the real interest rate plus the inflation rate.

Question 15

An extremely high rate of inflation is called _____.
A)super inflation
B)deflation
C)disinflation
D)hyperinflation

Accepted Answer

Hyperinflation is an extremely high rate of inflation, generally exceeding several hundred percent annually. It is characterized by rapid and out of control increases in the price of goods and services, which renders the country's currency worthless.

Question 16

It is difficult to engage in long-term financial planning when inflation is:
A)high and erratic.
B)low and stable.
C)accounted for through indexing.
D)predictable.

Accepted Answer

When inflation is high and erratic, it becomes difficult to plan for the long-term because the value of money can fluctuate rapidly, making it difficult to accurately predict future expenses and income. Additionally, the high inflation rate may also affect interest rates and investment returns, further complicating financial planning.

Question 17

Inflation reduces economic efficiency because it does each of the following except:
A)Distort incentives through interaction with the tax laws.
B)Obscure information transmitted by prices.
C)Induce people to minimize cash holdings.
D)Change relative prices.

Accepted Answer

Inflation does not inherently change relative prices; it generally affects all prices proportionally, though it can distort incentives, obscure price information, and lead people to minimize cash holdings.

Question 18

When inflation turns out to be different from what was expected, purchasingpower is ______.
A)destroyed
B)redistributed
C)increased
D)decreased

Accepted Answer

When unanticipated inflation occurs, an arbitrary redistribution of wealth or purchasing power occurs because some parties are helped and other parties are hurt by the inflation.

Question 19

The "true" costs of inflation are:
A)higher relative prices.
B)lower relative prices.
C)reduced economic growth and efficiency.
D)a higher overall price level.

Accepted Answer

Inflation can lead to reduced economic growth and efficiency due to the uncertainty it creates in the economy. Investors, consumers, and businesses may struggle to make long-term plans and investments, which can lead to a slowdown in economic activity. Additionally, inflation can lead to decreased purchasing power, resulting in lower standards of living for individuals and families. While inflation can also cause higher relative prices and a higher overall price level, the primary cost is the negative impact on economic growth and efficiency.

Question 20

The real interest rate is the:
A)market interest rate.
B)annual percentage increase in the nominal value of a financial asset.
C)annual percentage increase in the purchasing power of a financial asset.
D)the interest rate charged on a loan in dollar terms.

Accepted Answer

The real interest rate is the annual percentage increase in the purchasing power of a financial asset. It takes into account the nominal interest rate and adjusts it for inflation. Therefore, option C is the correct answer. Option A refers to the market interest rate, which is the rate at which borrowers and lenders are willing to trade funds. Option B refers to the annual percentage increase in the nominal value of a financial asset, which is affected by inflation and changes in interest rates. Option D refers to the interest rate charged on a loan, which may or may not reflect the real interest rate.

Quiz 5: Inflation and the Price Level

Suppose a borrower and lender agree to an interest rate on a loan when inflation is expected to be 6%.The borrower would benefit the most if which of the following inflation rates actually occurred?

The annual increase in the dollar value of a financial asset is called the:

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7% and inflation turns out to be 10% over the life of the loan, then the borrower and the lender .

The nominal interest rate is the:

The "true" costs of inflation to an economy include all of the following except:

Hyperinflation is:

The real costs of inflation to society include:

If the nominal interest rate is 8% and the real interest rate is 3%, then the inflation rate equals:

If the nominal interest rate is 10% and the inflation rate is 3%, then the real interest rate equals:

If the real interest rate is 3% and the inflation rate is 7%, then the nominal interest rate equals:

Suppose workers and employers agree to a three-year wage contract under the expectation of 3% inflation, but inflation turns out to be 1%.In this case, lost purchasing power, and gained purchasing power.

An inflation rate of over 500 percent per year would be classified as:

The real interest rate equals the:

The nominal interest rate equals the:

An extremely high rate of inflation is called _____.

It is difficult to engage in long-term financial planning when inflation is:

Inflation reduces economic efficiency because it does each of the following except:

When inflation turns out to be different from what was expected, purchasingpower is ______.

The "true" costs of inflation are:

The real interest rate is the: