Mod 14 & 15 review
Menu costs of inflation are the
costs associated with businesses changing prices
Unit-of-account costs of inflation are the
costs associated with money being a less reliable unit of measure
A process that brings the inflation rate down, is called:
disinflation
Which of the following represents the best scenario for a bank lending its money to a customer?
fixed interest rate of 8% with 1% inflation
Unanticipated inflation
helps borrowers and hurts lenders
An increase in the price level that is extreamly rapid (say 400% per year) is called
hyperinflation
Suppose that a bank wishes to make 5% rate of return on a one-year loan but expects that inflation over the course of the loan will be roughly 3%. Which of the following is true?
if the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a larger rate of return thsn expected
Over the last year, Eli has been working very hard and his employer has taken notice by giving him a 6% raise in his salary. During this last year, overall prices in the economy have increased by 4%. given this information, Eli's real wage has
increased by 2%
shoe leather costs refer to the
increased cost of transactions due to inflation
increases in the average level of prices is called
inflation
If the consumer price index changes from 120 to 125 between December 2007 and december 2008, the:
inflation rate for 2008 is 4.2%
inflation doesn't reduce purchasing power if
it causes an increase in nominal wages equivalent to the rate of inflation
you have gone to the bank to borrow money for one year. The nominal rate is 7.5%. the real rate of intrest is 4%. Over the course of the year, overall prices increased by 4%. This rate of inflation hurt the ___ because the actual rate of inflation was ___ than the anticipated rate of inflation.
lender; higher
The purpose of indexing Social Security payments to the CPI is to
maintain the purchasing power of retirees
Unit-of-account costs refer to the problem associated with high inflation rates that:
makes money
The threat of future inflation
makes people reluctant to loan money for long periods
When hyperinflation fprces Pedro to change the price stickers on the books in his bookstore very frequently to keep up with the aggregate price level, economists say that Pedro is experiencing a
menu cost
During rapid price inflation, firms must frequently change prices. The cost if changing prices is known as the
menu costs
Menu costs refer to the increased cost
of food in a time of inflation
which of the following is a likely response to inflation
people tend to make more transactions
alex expects the inflation rate to be 4%. if Alex borrows money at a nominal interest rate of 5%, his real interest rate is
positive and less than the nominal interest rate
which of the following statistics is used to measure changes in the prices that firms pay for goods and services
producer price index
If money income remains the same, while the average price level doubles
real income will fall
Unanticipated inflation
reduces the value of money
unanticipated inflation
reduces the value of the debt owed by borrowers
Menu costs are
the real cost of changing listed prices
the nominal interest rate equals
the real interest plus the expected rate of inflation
Which of the following is true concerning interest rates
the real interest rate can be zero, positive, or negative
Currently, banks are issuing personal loans at an interest rate of 9%. If expected inflation is supposed to be 3%, then
the real interest rate is 6% and the nominal intrest rate is 9%
The costs arising from the way inflation makes money a less reliable unit of measurement are known as
unit-of-account costs
prices decreased by 4%
use table 15-3 caculate by how much the prices changed between 2007 and 2008
Which one of the following price indices is commonly used to measure the cost of living?
consumer price index
the ____ is the most widely used measure of inflation in the united states
consumer price index
if the cost of a market basket is $200 in year 1 and $230 in year 2, the price index for year 2 with a year 1 base is
115
you read in the newspaper that the CPI in 2008 was 120, you will conclude that a typical market basket in 2008 would cost
20 percent more than the same market basket purchased in the base year
Which of the following annual rates of inflation would most likely be called hyperinflation? a.5% b. 13% c. 25% d. 2000% e. 15%
2000%
If the CPI is 120 in year 1 and 150 in year 2, then the rate of inflation from year 1 to year 2 is ____.
25%
Suppose the real interest rate is 2.1% and the nominal intrest rate is 5.4% then the expected inflation rate is?
3.3%
Suppose that the nominal rate of interest is 7% and the expected inflation rate is 3% then the real rate of intrest is equal to:
4%
if the cost of a market basket is $150 in year 1 and $200 in year 2, the price index for year 1 with a 2 year base is
75
100%
Use Table 15-1. The approximate rate of inflation in Year 2 is _____ percent.
5%
Use Table 15-1. The approximate rate of inflation in Year 3 is _____ percent.
.20%
Use Table 15-1. The approximate rate of inflation in Year 5 is _____ percent.
D. 2005
Use Table 15-2. Consider the information in the table provided. Which year is most likely to be the base year? A. 2006 B. 2008 C. 2007 D. 2005 E. A year not presented in the table
deflation is when there is
a decreasing aggregate price level
suppose that a country has a progressive income tax code, where taxable income is caculated in nominal terms but the schedual of income taxes rates is NOT indexed to inflation. An individual whose income keeps up with inlation will find that, over time she will pay:
a higher percentage of her in taxes over time
Inflation is when there is
a rising aggregate price level
in periods of unexpected inflation
borrowers benefit since they repay their loans in dollars with lower real value
when inflation rises quickly
borrowers will be hurt and lenders will benefit
The consumer price index reflects the
changes in the prices of goods and services typically purchased by consumers
Deflation is a(n)
decrease in the average level of prices
high rates of inflation often result in people spending inordinate amounts of time trying to make transactions and finding ways to keep the real value of their money from decreasing. This is an example of ______ costs.
shoe leather
The invention of ATM machines reduced
shoe leather costs of inflation
when hyperinflation forces Emily to visit her bank very frequently to keep jer cash holdings to a minimum, economists say that emily is experiencing a:
shoe-leather cost
The inflation or deflation rate is
the change in a price index divided by the initial value of the index
when there is deflation in the economy
the general price level falls
If the actual inflation rate is less than the expected inflation rate:
the lenders gain and the borrowers loose
Unit-of-account costs refer
the loss of reliability of money as a relative unit of measurement
the aggregate price level is
the overall level of prices in the economy
Inflation can be measured by
the percentage change in the CPI