Micro 17
Suppose the price level has increased from 103 to 107. Which of the following is the inflation rate?
3.88%. Inflation is measured as a percentage change in the overall price level: 100 x ((107 - 103)/103) = 3.88%.
Suppose the nominal interest rate is 6% and the inflation rate is 2%. What is the real interest rate?
4%
Suppose the Consumer Price Index has increased from 100 to 105. What is the inflation rate?
5%
Which of the following describes the relationship between the value of money and the price level?
As the price level falls, the value of money rises
Why do people believe in the inflation fallacy?
People tend to forget that inflation in prices goes hand in hand with inflation in incomes
Which of the following explains why the demand curve for money is downward sloping?
People want to hold a larger quantity of money when each dollar buys less.
Which of the following describes how inflation can be measured?
Percentage change in the GDP deflator
Which of the following describes how inflation is usually measured?
Percentage change in the consumer price index.
When higher inflation reduces the value of money
Shoeleather costs of inflation increase
Which of the following is an example of menu costs?
Stores advertising new prices
During the 1770's, the United States
relied heavily on the inflation tax
Bertha owns a pastry shop and café in an economy that is prone to rapid inflation. If Bertha reprints her menu every month,
she bears a high menu cost and the relative price of her pastries is too low
Which of the following theories can explain both inflation and hyperinflation
The quantity theory of money
Suppose the nominal interest rate is 8%, the inflation rate is 3% and the tax rate is 45%. What is after-tax real rate of interest?
1.4%. The government takes 45% of the nominal rate of 8%, leaving an after-tax nominal interest rate of only 8% - (8% x 0.45) = 4.4%. Thus the after-tax real interest rate is 4.4% - 3% = 1.4%
Suppose the Consumer Price Index has increased from 105 to 107. What is the inflation rate?
1.9%. Inflation is measured as a percentage change in the overall price level: 100 x ((107 - 105)/105) = 1.9%.
Bertha purchased 10 shares of BestSnack, Inc. stock for $200 per share; in one year, she sold the 10 shares for $220 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much tax does Bertha pay on her gain?
100. Bertha's capital gain is ($220 - $200) x 10 = $200, of which the government takes 50%, leaving her with $200 x (1 - 0.50) = $100. Note that the remaining 3% is taken by inflation, not the government.
Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level increased from 140 to 147. What is Bertha's before-tax real capital gain?
19%. The inflation rate is 100 x ((147 - 140)/140) = 5%. Bertha paid $5 for five shares last year. Now, she sold them for $5 per share, making 5 x $5 = $25 while gaining $25 - $5 = $20. Of her $20 gain, 5% is lost to inflation: $20 - $20 x 0.05 = $19.
The real interest rate is 4%, inflation is 2%, and the marginal income tax rate is 25%. What is after-tax real rate of interest?
2.5%. The income tax treats this entire nominal interest of 4% + 2% = 6% as income, the government takes 25% of it, leaving an after-tax nominal interest rate of only 6% - (6% x 0.25) = 4.5%. The after-tax real interest rate is 4.5% - 2% = 2.5%
Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level decreased from 147 to 140. What is Bertha's before-tax real capital gain?
21. the inflation rate is 100 x ((140 - 147)/147) = -5%. Bertha paid $5 for five shares last year. Now, she sold them making 5 x $5 = $25, gaining $25 - $5 = $20. However, since the price level has decreased, Bertha is actually gaining more: $20 - ($20 x (-0.05)) = $21
Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much did Bertha earn?
242.5 Bertha's capital gain is ($25 - $20) x 100 = $500, of which the government takes 50%, leaving her with $500 x (1 - 0.50) = $250. Of this amount, 3% is lost to inflation, which means that Bertha earns only $250 x (1 - 0.03) = $242.5.
Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much tax does Bertha pay on her gain?
250. Bertha's capital gain is ($25 - $20) x 100 = $500, of which the government takes 50%, leaving her with $500 x (1 - 0.50) = $250. Note that the remaining 3% is taken by inflation, not the government.
The real interest rate is 5%, inflation is 3%, and the marginal income tax rate is 25%. What is after-tax real rate of interest?
3%. The income tax treats this entire nominal interest of 5% + 3% = 8% as income, the government takes 25% of it, leaving an after-tax nominal interest rate of only 8% - (8% x 0.25) = 6%. The after-tax real interest rate is 6% - 3% = 3%.
Suppose P is the price level (the GDP deflator), Y the quantity of output (real GDP), V is velocity, and M the quantity of money if M = 600, V = 5, and Y = 1000, what is the price level?
3. P = (V x M) / Y
The nominal interest rate is 10%, inflation is 4%, the marginal income tax rate is 25%. What is after-tax real rate of interest?
3.5 The government takes 25% of the nominal rate of 10%, leaving an after-tax nominal interest rate of only 10% - (10 x 0.25) = 7.5%. Thus the after-tax real interest rate is 7.5% - 4% = 3.5%.
Consider an economy producing only widgets, which cost $2 each. If you have $100, what is the real value of the money you hold?
50 widgets. If the price of widgets increases, you will need more money.
Suppose P is the price level (the GDP deflator), Y the quantity of output (real GDP), and M the quantity of money. If M = 1,000, P = 2, and Y= 3,000, what is velocity (V)?
6. V = (P x Y)/M
The nominal interest rate is 8%, inflation is 1%, the marginal income tax rate is 10%. What is after-tax real rate of interest?
6.2%. The government takes 10% of the nominal rate of 8%, leaving an after-tax nominal interest rate of only 8% - (8% x 0.10) = 7.2%. Thus the after-tax real interest rate is 7.2% - 1% = 6.2%.
The nominal interest rate is 12%, inflation is 3%, the marginal income tax rate is 10%. What is after-tax real rate of interest?
7.8%. The government takes 10% of the nominal rate of 12%, leaving an after-tax nominal interest rate of only 12% - (12% x 0.10) = 10.8%. Thus the after-tax real interest rate is 10.8% - 3% = 7.8%.
Bertha purchased 10 shares of BestSnack, Inc. stock for $200 per share; in one year, she sold the 10 shares for $220 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much does Bertha earn?
97. Bertha's capital gain is ($220 - $200) x 10 = $200, of which the government takes 50%, leaving her with $200 x (1 - 0.50) = $100. Of this amount, inflation takes another 3%: $100 x (1 - 0.03) = $97.
Suppose P denotes the price of goods and services measured in terms of money.
A decrease in the value of money is associated with an increase in P.
Which of the following describes the relationship between the value of money and the price level
As the price level rises, the value of money falls.
Which of the following describes monetary neutrality?
Changes in the supply of money affect nominal variables but not real ones.
Bertha lends $1,000 to Danko for 2 years and charges an annual interest rate of 6%. Bertha had anticipated the inflation rate of 2%, but it actually turned to be 2.5%. In two years, as a result of the higher-than-expected inflation,
Danko is better off at the expense of Bertha
As the price level increases, the value of money increases
False
In the U.S., people are required to pay taxes on real capital gains irrespective of their nominal capital gains
False
The immediate effect of a monetary injection increases the economy's ability to supply goods and services.
False
When inflation was expected to be high and it turns out to be low, wealth is redistributed from creditors to debtors.
False
There are no costs of deflation
False.Deflation causes the value of debts to increase in real terms, transferring money from debtors to creditors. It also has menu costs and relative price variability.
Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 3% but it actually turned to be only 2%.
Her real interest rate was higher than expected, and the real value of the loan is higher than expected.
Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 2% but it actually turned to be 4%.
Her real interest rate was lower than expected, and the real value of the loan is lower than expected.
Which of the following is true about inflation and relative prices?
Higher inflation increases the relative-price variability distorting the resource allocation
Which of the following reforms would allow for the taxation of only real interest earnings?
Indexing the tax system to take into account the effects of inflation
Which of the following is true about the inflation tax in the United States?
It falls most heavily on those who hold a lot of currency but accounts for a small share of U.S. government revenue.
Which of the following describes the effect of a decrease in the money supply?
The money supply curve shifts to the left, the price level decrease causing the value of money to increase.
Which of the following describes the effect of an increase in the money supply?
The money supply curve shifts to the right, the price level increases causing the value of money to decrease.
Which of the following is the immediate effect of a monetary injection?
The money supply increases, whereas the economy's ability to supply goods and services does not change.
Which of the following describes the Fisher effect?
The nominal interest rate adjusts to the inflation rate.
Which of the following explains why the supply curve for money is vertical?
The quantity of money supplied is fixed by the Federal Reserve.
Which of the following describes the money equilibrium in the long run?
The quantity of money that people want to hold equals the quantity of money supplied by the Fed.
Which of the following theories explains the long-run determinants of the price level and the inflation rate?
The quantity theory of money. According to this theory, the quantity of money available in an economy determines the value of money, and growth in the quantity of money is the primary cause of inflation.
An increase in the value of money decreases the price of goods and services measured in terms of money.
True
In the U.S., the income tax treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation.
True
When deciding how much to save, people care most about before-tax nominal interest rates
True
When inflation rises, the nominal interest rate rises, and people desire to hold less money
True
When inflation turns out to be higher than expected, wealth is redistributed from lenders to borrowers
True
When inflation was expected to be high and it turns out to be low, wealth is redistribute from debtors to creditors
True
Which of the following describes the meaning of the demand for money?
Wealth that people want to hold in liquid form
The principle of monetary neutrality implies that
an increase in the money supply will increase the price level, but not real GDP
As inflation rises
menu costs and shoeleather costs (convert cash into goods) of inflation increase.
The inflation tax is not exactly like other taxes because ____
no one receives a bill from the government for the tax
One cost of deflation is
the redistribution of wealth toward creditors and away from debtors.
As the price level increases,
the value of money decreases.
As the price level decreases,
the value of money increases
